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Choosing an appropriate business structure is one of the most important decisions you will make when setting up your business. The taxes you pay, your personal liability and your ability to grow and attract funding are all dependent on the structure you choose. Sure, you can change it later. However, it almost always comes with tax implications and administrative burdens. In this article, we discuss why a company structure tends to be better than other structures like a sole trader or a partnership if you have plans for growth. A company structure makes attracting investment easier, limits your personal liability and offers mechanisms to protect your personal assets.

Ease of Attracting Investment

A growing business will need funding. For example, you need to employ more people or invest in research and development. Whatever the reason, funding can increase your business’ activities and profitability. Businesses primarily raise money through debt or through acquiring investment from third parties. 

Raising capital through debt involves borrowing money from a lender on the condition that you repay the loan amount with interest by the due date. Attracting investments is where investors invest in exchange for a stake in your business. You are generally under no obligation to repay the investment amount to the investor. Instead, they are betting on your business being successful and the value of their equity in your company increasing. 

Typically, most small and medium-sized enterprises opt for capital raising through debt. It is more traditional and straightforward. However, if you are a startup, you are more likely to raise money through investment. One reason is that most traditional lenders will not lend to startups because it does not fit their risk profile.  

Additionally, a company structure is more attractive to investors than other business structures. This is because investors, whether angel investors, venture capitalist funds or others, are more familiar with a company structure. Company law in Australia is also well established, which gives the investors more clarity on their risk. It is also easier to buy and sell their equity holding in a company by buying and selling shares, which is a straightforward process. 

Limited Liability 

A growing business will often mean more legal relationships with third parties like new customers, suppliers, investors, or lenders. More legal relationships mean more legal obligations, which in turn means more liabilities. Therefore, it is prudent for a business owner to limit any business’ liabilities that they are liable for in their personal capacity. 

A company structure is better at doing this than other business structures like sole trader or partnership. As a separate legal entity, the company is liable for its legal obligations, not the business owner. So, suppose your business has borrowed money and the business cannot pay the debts. In that case, the creditors will only generally have recourse against the business and the business assets and not the business owners’ personal assets. 

Compare this to a sole trader or a partnership where the partners are individual. In these structures, usually, the business owner or partners are each personally liable for the obligations of the business. Indeed, if the business suffers debts, they may need to meet those liabilities from their personal pocket. 

Greater Asset protection

Asset protection is linked to liability. Asset protection is fundamentally about limiting the extent to which creditors of a business will have access to the assets owned by the business or business owner in their personal capacity if the business runs into trouble. 

Indeed, a company structure is better at protecting your personal assets than other structures. This is because, as mentioned above, business owners are not personally responsible for the business’s liabilities due to the separate legal personality of companies. Therefore, creditors of the business generally cannot access your assets like your home and car. However, in a sole trader or partnership, the creditors can access the business owners’ personal assets. Here, there is no distinction between the liabilities of the business and the liabilities of the business owner. 

If you want a business structure that offers superior asset protection, you could consider a dual company structure. This structure can provide asset protection for both your personal assets and business assets.

Dual Company Structure

A dual company structure involves setting up two companies. 

The first company will be the trading company. This company will employ the staff, enter into contracts, and manage the business’s day-to-day operation. 

The second company will be the holding company. This company should be the shareholder of the trading company and must own all the assets of your business. You may also want to consider passing any surplus cash from the business not required for the daily operation of the business to the holding company as a dividend.

Ultimately, the dual company structure helps to store the assets and liabilities in two separate legal entities. The trading company holds your liabilities while the holding company holds the assets. However, this could potentially limit the business assets creditors of your business can access. This is because the trading company, which is liable to meet obligations to those creditors, does not own any assets.

Although dual company structure has many benefits, it can also be more expensive to manage. For instance, any income that you will pay the holding company as a dividend may be subject to tax. Therefore, you should carefully consider whether a dual structure is suited for your business. 

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Key Takeaways

There are many ways to structure your business. If your business has plans for growth, then structuring your business as a company can offer various benefits. Such benefits include:

  • ease of raising capital; 
  • limited personal liability; and 
  • better asset protection for your personal assets.  

If you have more questions on structuring your business as a company or would like to set up your business as a company, LegalVision’s experienced business lawyers can assist. You can call them on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

How does a dual company structure offer greater asset protection?

In a dual company structure, the first company is the trading company. This company will employ the staff, enter into contracts, and manage the business’s day-to-day operation. The second company is the holding company and must own all the assets of your business. Hence, the dual company structure helps to store the assets and liabilities in two separate legal entities.

How does a company structure better facilitate business growth?

If you have plans for growth and development, structuring your business as a company can offer various benefits. Such benefits include ease of raising capital, limited personal liability, and better asset protection for your personal assets.  

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