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Choosing the right business structure for you
When starting a business, choosing the right business structure for you involves many factors that require your consideration. The business structure will affect your tax liabilities, paperwork and reporting requirements, your potential personal liability and the costs involved in the ongoing running of the business.
Below are some key points of each structure to assist you in choosing the right business structure for you.
This is the simplest formation. An individual operating as the sole owner and is legally responsible for all aspect of the business. Sole Proprietorship is a good choice for a start-up business who want to test their idea and plan on being the sole owner of the business. It is inexpensive to set up and requires less reporting than the other structures. A disadvantage of this structure is that you are personally liable for the business’s debts. Your business assets and personal assets are not separate.
Partnerships are the simplest formation for two or more people to own a business together and have minimal reporting requirements. This structure is a good option for a start-up business that has more than one owner. Partnerships allow share control and management, but the partners are personally liable for business debts. It is important to note it is advisable to have a formal legal agreement set out because personal liability is unlimited for each partner and one partner may be held liable if another partner cannot afford to pay their share of any debts.
A company is a legal entity separate from its owners. It can incur debt, sue and be sued. This structure is more complex and has higher costs involved in the setup and running of the business. A company is good to consider if you would prefer to keep the entity and assets separate from you personally but must keep in mind the reporting requirements and legal obligations are much higher for a company. Companies need to register with ASIC (Australian Securities and Investments Commission) and pay a yearly fee to stay a registered company. The owners (shareholders) also need to comply with all obligations under the Corporations Act 2001.
Unit Trust or Discretionary Trust
A trust is an obligation imposed on the trustee to hold property or assets for the benefit of the owners (beneficiaries). A trustee may be an individual or company and is legally liable for the debts of the trust. This structure can be expensive to set up as it requires a formal trust deed outlining how the trust operates. The benefit of using a trust is that there is more flexibility in how the income is distributed between the beneficiaries and if you decide to have a company as the trustee this will provide personal asset protection to the owners.
I’ve already chosen a business structure – am I locked in?
The structure you choose does not have to be locked in for the life of your business, as your business changes you may want to change your structure to adapt to your needs. There are some obligations involved with changing your structure that can be discussed with your accountant.
With the above information in mind, it is important to discuss a proposed structure with your business advisor and seek advice before making a final decision. There is no one size fits all for business structures.
Contact us today to discuss your options.
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