When starting a small business, you need to choose which type of business structure to use. It is very important to understand the responsibilities of each structure, as it will affect the set-up and running costs, the tax obligations, asset protection, and potential personal liability.
Sole trader
A sole trader structure is the simplest and least expensive to set up with fewer tax and legal obligations. As a sole trader, you are personally responsible for aspects of the business, including any debts the business incurs which you are personally liable for.
PROS – (1) the owner is in full control of decision making (2) simplest and cheapest to set up (3) owner takes all profits
CONS – (1) unlimited liability on the owner (2) income is taxed at individual tax rate (3) limited access to finance
Partnership
A partnership structure is two or more individuals or entities who go into business together as partners. A partnership is not a separate legal entity so consequently, the partners are liable for all the debts and obligations of the business. The management and control of the business is shared. It is highly recommended (but not essential) that a formal partnership agreement is put in place.
PROS – (1) simple and low set up costs (2) shared responsibilities and obligations (3) high degree of control over the business
CONS – (1) unlimited liability on the partners (2) personal differences can create decision-making conflicts (3) if one partner leaves, the partnership is terminated
Company
A company is a separate legal entity. It means that it has the same rights as a natural person and can incur debt, sue, and be sued. The company’s shareholders (owners) can limit their personal liability and are generally not liable for company debts (unless they give personal guarantees to borrow money). Companies are taxed at a different rate to individuals. A company is a complex business structure, with higher set-up and administrative costs. Companies must be registered with ASIC, and company officeholders have legal obligations under the Corporations Act. Company officers (e.g. directors) must comply with other legal obligations under the Corporations Act.
PROS – (1) separate legal entity (2) limited liability applies to shareholders personal assets (3) easy transfer of ownership (4) tax benefits
CONS – (1) higher set up and ongoing costs (2) high compliance requirements (3) insolvent trading risks to directors personally
Trust
In legal terms, a trust is a relationship (not a legal entity) in which one party (the settlor) gives property to another person (the trustee) to hold or conducts a business for the benefit of a third person (beneficiary). Trusts are treated as taxpayer entities for the purposes of tax administration. The trustee is responsible for managing the trust’s tax affairs, lodging tax returns, and paying some tax liabilities. The beneficiaries (with some exceptions) include their share of the trust’s net income as income in their own tax returns.
PROS – (1) income distribution at the trustee’s discretion (2) limited liability if corporate trustee (3) more privacy than a company
CONS – (1) higher set up and ongoing costs (2) high compliance requirements (3) the trust deed limits the trustee’s powers
Conclusion
Deciding on the right business structure deserves careful consideration. Call us on 07-3286 2407 for a FREE consultation and enjoy a successful new business journey.