Opening your own hair salon is a milestone for any hairdresser. You may be wanting to open a salon so that you are self-employed. You may also be wanting to provide your own clients with services that align with your vision of what a hairdressing experience should be. However, opening a hairdressing salon is a big responsibility, even if you have previous experience in the hairdressing industry.
One of the most important things you will need to consider when planning to open a hairdressing salon is how to structure your business. Your business structure is the legal framework of your business. It has the potential to reduce your exposure to financial risk and enable flexibility for growth. The wrong business structure for a new business may be costly and may not be suited to your business goals. This article considers four popular business structures and their suitability for hairdressing businesses.
1. Sole Trader
If you are starting a hairdressing salon on your own or are wanting to freelance, you may choose to operate as a sole trader. As a sole trader, you will have full control and autonomy of the running your business. This structure is usually relatively easy and cheap to set up. It also has minimal legal formalities.
To set up as a sole trader, you will need an Australian Business Number (ABN). If you intend to trade under your own name, then you don’t need to register a business name. However, if you plan to operate under a different name, you simply need to register a business name with the Australian Securities and Investments Commission (ASIC).
Although it has an easy setup, this structure does come with risk. If any of your clients sue you or you incur any debts, you will be personally responsible. This means that if you can not repay these debts from the funds of the business, you will have the repay the debt from your own personal finances.
Also, as a sole trader, you have limited resources available to fund the growth of your business. You will need to rely on:
- personal savings;
- loans; and
- business profits.
You cannot raise funds from the general public. Being a sole trader may also not be the most tax-effective decision. This is because a sole trader is liable to the same tax rate applicable to individual taxpayers on income earned. You should check this with an accountant or tax lawyer.
If you plan to open your hairdressing salon with one or more business partners, you may choose to enter into a partnership. Similar to a sole trader, the setup is simple and has minimal upfront costs. You will require an ABN for the partnership and most partnerships also register a business name.
It is also important for the partners to enter into a partnership agreement. This agreement governs the relationship between partners and sets out key terms, which may describe:
- how the business will be managed;
- how the profits will be shared;
- who will fund the partnership;
- how you or your partners can sell your share in the business; and
- the process for managing disputes.
However, setting up a partnership also comes with risks. Like a sole trader, if someone sues you or you go into debt, your personal assets and finances will be at risk.
Additionally, partnerships involve joint liability. Therefore, you may be personally liable for business debts owed by any of the other partners. The amount owed is not divided proportionally according to your percentage of ownership in the business, so you could be responsible for paying the entire amount.
Like a sole trader, you cannot raise funds from the general public to fund the growth of your business. You will need to rely on:
- the savings of each partner;
- loans; or
- business profits.
However, unlike a sole trader, you can look to bring on more partners to increase the pool of funds available for the business.
Whether you are operating your hairdressing salon on your own or with other business partners, you may decide to operate as a company. A company is a separate legal entity. This means it is capable of suing and being sued. It also holds assets in its own name and can enter into contracts in its own name.
There are two key players involved in the management of a company. These are shareholders and directors. As the founder of your business, you will usually be both a shareholder and a director of the company that you establish. Any other business partners may also take on these roles.
To set up a company you will need to register it with ASIC and pay the initial registration costs. You may also need to register the company for:
- an ABN,
- a tax file number (TFN),
- goods and services tax (GST) and
- pay as you go (PAYG).
When you set up your company you will need to determine the internal rules the will govern your business. Further, it is important to put in place a shareholders agreement if you have more than one shareholder. This governs the relationship between shareholders in the same way that a partnership agreement does. This document will set out, among other things, the shareholders’ expectations of how the directors will run the company.
Unlike other structures, your personal assets are typically not at risk in a company. Instead, only the assets of your business that are owned by the company are at risk.
This structure is also beneficial as it allows you to easily fund any future growth by the raising of additional funds from shareholders. Further, companies have lower tax rates than personal income taxes.
You may also consider operating your business through a trust structure. Unlike a company, a trust is not a separate legal entity. A trust has a trustee who is the legal owner of the trust assets. The trustee may be an individual or company, and they operate the business on behalf of the people who are entitled to profits from the business (the beneficiaries).
Establishing a trust includes some initial set up costs for:
- the drafting of a trust deed;
- the settling and stamping of the trust; and
- registering the trust for an ABN.
This business structure does present some limitations.
Also, to avoid high taxes, a trust is required to distribute its profit to beneficiaries each financial year. This can be problematic if you need profits within the business for future growth.
When starting a hairdressing salon, the business structure you choose will have impacts on you, such as:
- personal exposure to risk;
- tax requirements;
- ongoing costs;
- compliance obligations; and
- future growth.
If you have any questions about business structuring or need assistance when starting a hairdressing salon, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.
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