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What Business Structure is right for you?
So you’re all excited, you’re going into business and can’t wait to start.
To make sure you get off on the right foot, it’s important to plan properly and set your business up correctly.
What are the most common types of business structures?
- Sole Trader
I will briefly explain some of the key aspects of the business structure listed above.
Simple to set up and operate. Low-cost structure, with minimal reporting requirements. Suitable for businesses with minimal risk. Often used when first starting out, easy to change the business structure in the future.
If you don’t employ people then you have no obligation to pay superannuation, workers comp, or payroll tax for yourself.
The main disadvantage is the unlimited liability. All your personal assets are at risk if things go wrong. Your personal assets can be seized to recover a debt.
A company is a separate legal entity. This means the company has the same rights as a natural person. Naturally, it is more complex in its structure, requiring higher setup and running costs. It also needs to be registered with ASIC and thus has greater reporting requirements.
The main advantage of a company is limited liability. Except in the case of providing personal guarantees the company will generally protect the individuals from being personally sued, thus protecting their personal assets.
As a sole trader, a partnership is relatively easy and inexpensive to set up. It allows two or more people to go into business in a relatively simple way and can be easily dissolved at the end of the partnership.
However, similar to a sole trader, you and your business partner are personally liable for the debts of the business.
The partnership doesn’t pay income tax on the income earned. Each partner pays tax on their share of the net partnership income. The partners are not employees of the business, so there are no superannuation or workers comp obligations to be paid on their drawings.
Probably the most complex and misunderstood business structure.
A trust is an obligation imposed on a person (trustee) to hold property or assets for the benefit of others (beneficiaries). The trustee can be an individual or company.
Trusts can be expensive to set up and operate. They require a formal trust deed that outlines how the trust operates.
Trusts have three main advantages:
Allows the trustee to distribute income as they please, in the case of a discretionary trust
If the business has a sale value, allows the trust to access the small business concessions if it meets the criteria
If the trust has a corporate trustee, the trust has the limited liability advantages for the trustee and beneficiaries
Remember, before choosing a business structure it’s important to get professional advice from an accountant. Everyone’s circumstances are different and this may influence the final structure you choose.
Check out another recent blog in this category.
Need help deciding on a business structure?