When you are planning to start a business, one of the first things you would have to consider is your business structure. An understanding about the different types of business structures will help you in making the right decision for your venture. You should compare and evaluate each structure keeping your goals in mind.
Some things to start thinking about are:
- The costs for setting up and maintaining each business structure;
- The process, compliance and duration to setup your business;
- The potential for growth and scalability;
- Tax advantages and disadvantages; and
- The liability and risk aspects.
There are four types of business structures to choose from:
- Sole Trader
It is the easiest one to start and cheapest too. You can run your business as a sole trader immediately. There are no lengthy legal requirements, however, your business will not be treated as a separate legal entity. This means that you will be personally liable for any deb tor liability caused by the business, whether legal or financial. As a sole trader, you will be taxed under your personal income. It is mostly suited for small home-based businesses and contractors.
Partnership is the association of 2 or more individuals who operate a business as a partnership. It is cheaper than establishing a company but comes with its own set of challenges similar to a sole trader. All partners would be personally liable for the business’ debt or legal problems or for decisions made by the other partners. It is highly recommended you have a Partnership Agreement that clearly sets out the agreement between the partners, including the rights and obligations of each partner.
A company is treated as a separate legal entity which means that the directors have a limited liability. A company structure is popular among start-ups as it allows directors to grow and scale their business. The biggest advantage is that a company enjoys greater tax benefits in comparison to a sole trader. Directors of companies have an obligation to ensure compliance with the Corporations Act.
A trust is another structure that can be used to run a business. The appointed trustee, either an individual or a company, is responsible for controlling the trust and distributing the profits to the beneficiaries, according to the trust deed. A trust also has tax benefits associated with it.
You may change the structure of your business depending upon its growth. However, to ensure that your business structure is established with your long-term vision in mind, we recommend speaking to one of our commercial lawyers to discuss your strategy and goals.
Our Commercial Law team can guide you through the legal requirements to ensure your business is structured with your best intentions in mind. Consider a quick chat with us to know more. To get further advice call our Melbourne commercial law team on 03 9743 1333, our Perth commercial law team on 08 6183 3753 or email .