Starting a new business has never been easier. With ecommerce opportunities aplenty, and more traditional small business continuing to grow strongly, Australian’s are launching thousands of new businesses a day. Even though thinking about the potential business structures for your new business is one of the less interesting aspects of launching, it’s important that you sit down and consider your options before you start trading. There are a number of business structures available in Australia, and the structure you choose early on will affect both your legal and operational risk, tax obligations and legal costs. This article sets out the most common legal structures used by Australian businesses.
The simplest legal structure under which you can run a business is as a sole trader. As a sole trader you operate and manage a business under your own name. The majority of Australian businesses are in fact run by sole traders. This business structure is cheap to set up, simple to administer and easy to wind down. If you’re running a simple business, you’re covered by insurance and you don’t generate a huge amount of revenue, setting yourself up as a sole trader makes a lot of sense.
There are however some downsides to the sole trader business structure. You take on all the risk of the business personally, meaning you can be sued as an individual if something goes wrong. Obviously you can take out insurance, but you are better off if your personal property isn’t on the line if a business deal goes south. Furthermore, your earnings are taxed as personal income, so if you do well in a given year there are few opportunities for tax planning.
If you’re going into business with a partner, a partnership structure can be a great way to set yourselves up. A partnership basically consists of a group of entities that run a business as partners. The entities are normally individuals, but can be companies. A partnership isn’t a legal entity but it will have an ABN and TFN. It’s cheap to set one up; all you need is a partnership agreement.
Unfortunately the big problem with a partnership relates to the fact that each partner is legally responsible for any losses and liabilities racked up by the other partners. This includes superannuation and taxation obligations. You need to be really comfortable with your partner if you’re going to go down this route.
A partnership structure also doesn’t leave much scope for tax planning.
Perhaps the most common business structure for start-ups and larger SMEs (as well as all of Australia’s large companies), is the company structure. The limited liability company has been credited with launching the revolution in business which ultimately led to the industrial revolution in Western Europe. The most important benefit of the company structure is that it is a legal entity which is separate to its shareholders and directors. This means if the company goes insolvent, the shareholders are protected; they will lose their investment in the company, but are not personally liable for the company’s debts.
Another benefit of using a company structure is that you can bring on board investors easily and restructure your business effectively.
There are costs to setting up a company. These include the initial set-up costs, annual fees which must be paid to ASIC and compliance costs.
Finally, you may wish to consider a trust structure when setting up your business. A trust structure is more complex than a sole trader or partnership set up, but is relatively common. The most common type of trust, a discretionary trust, is a trust in which the trust fund is held by a trustee and administered in accordance with the terms of a deed. The trustee’s job is to work out which of the beneficiaries will be apportioned a distribution of either capital or income from the trust in each financial year.
Using a trust structure allows you to reduce tax, by streaming distributions to beneficiaries on lower tax rates. It’s also a great way to reduce your liability as an asset holder.
It’s important that you pick the appropriate business structure for the new business you’re launching. It’s a good idea to have a discussion with a lawyer to make sure you’ve thought of all the issues. Your main goal should be to prepare for the future!