Starting up a new business? What business structure should I have?

February 16, 2016

So you have decided to take that leap of faith to become an entrepreneur and small business owner but how do you go about starting up a new business? You may have heard around the traps about Companies, Trusts, Partnerships and Sole Traders but how do they fit with what you are about to embark upon?

Formalising your business structure is a very important step in your initial business establishment and ongoing business operation. Whilst, it is possible to change structure at a later stage this is not advisable as it may be costly and quite time consuming. Therefore, choosing the most appropriate structure for your current and expected position is extremely important.

So what are the options and what are their benefits & shortcomings?

Sole Trader

Is the simplest and most cost effective trading structure. In this case a person trades and assumes all responsibility for the business. The Sole Trader will be required to obtain Australian Business Name (ABN) this process is however, quite simple and free of charge.

Benefits

  • Low Start-up Cost
  • Simple
  • Easy to wind up or change structure

Shortcomings

  • Unlimited Liability
  • Difficult to obtain funding
  • Taxed as individual

Partnership

Similar to that of a sole trader, a partnership it is quite simple and straightforward to setup. A Tax File Number (TFN) will however, need to be setup. A partnership can have up to 20 partners; it however, is not a separate legal entity so should things go wrong all partners will be liable for the firm’s debts.

Benefits

  • Low Start-up Cost
  • Simple

Shortcomings

  • Unlimited Liability
  • Not a separate legal entity
  • Cannot retain earnings

NOTE: If you unsure about what business structure is suitable for your business, why note download our FREE Business Structure Flowchart?

FREE BUSINESS STRUCTURE FLOWCHART

Company

A company is a separate legal entity that engages in business. Unlike that of a Sole Trader or Partnership a Company has limited liability. This means the company is liable for its debt not that of its owners/shareholders.  Typically setup costs and ongoing maintenance costs are higher under a company structure and Directors need to ensure they understand their obligations under the Corporations Act 2001. Under a company structure distributions (dividends) can be made to shareholders or retained within the business. Companies are required to lodge an individual tax return, as are individuals working for the business or receiving dividend payments.

Benefits

  • Separate Legal Structure
  • Asset Protection
  • Limited Liability
  • Allow for effective entry & exit of partners
  • Tax minimisation

Shortcomings

  • Setup costs are higher
  • Compliance costs are higher
  • Profit Distributions are Taxable
  • Some company information is public

Trusts

In a Trust the ‘Trustee’ operates the business on behalf of beneficiaries. There are two main types of trusts, Discretionary Trusts and Unit Trusts. Under a Discretionary Trust the Trustee has the power to determine to profit distributions between the beneficiaries. Under a Unit Trust however, these distributions are predetermined by unit holdings outlined in the trust deed. Unlike Sole Traders & Partnerships beneficiaries are not typically liable for trust debts. Trusts can be a great vehicle for income splitting, asset protection and tax minimisation. Establishment and ongoing maintenance costs are typically higher and require a solicitor or accountant to establish. Unlike a company a trust cannot retain earnings.

Benefits

  • Reduced Liability
  • Asset Protection
  • Tax Minimisation (Income Distribution)

Shortcomings

  • Setup & ongoing maintenance costs are high
  • Difficult to alter
  • Can’t retain Earnings (Retained Earnings attract penalty rates)

Setting up your business with the right structure will save you significant time and dollars in the long run. Whilst, each structure has their own specific benefits and shortcomings the right structure may allow for you to minimise tax, protect assets, reduce liability and allow for effective entry and exit of new partners.

Some important questions to consider when selecting the appropriate structure for your business are:

  • What is the risk of your specific industry?
  • What is your annual turnover likely to be?
  • How many owners are you going to have?
  • What is the estimated value of assets held by the business?

When choosing a business structure you should always consult with an industry professional as they will likely be able to talk you through the specifics around your particular situation. Good luck with your new venture.

Brent Cain
Founder & Managing Director
C3MG Consulting