So you are starting a consulting business and need to work out how best to structure your business to meet your commercial needs. Which business structure you choose will depend on many factors including how much you are willing to outlay initially versus how much you want your business to grow in the future.
It is important to keep in mind the risks associated with each business structure, the level of asset protection and personal liability, and other financial obligations such as tax. Consultancy businesses can be large or small, specialised or diverse. To help you better decide, we step you through three business structures as well as their key features.
Sole Trader Consultant
If your consultancy business consists of just yourself, then this would be a logical business structure for you to choose. It’s also cheap and easy to set up. Any business revenue you make will be your personal income and you will be taxed as such. This business structure, however, won’t provide you with much flexibility and opportunity for growth and so you should consider your business goals in this regard. You are also personally liable for your business debts, and if you raise revenue via a loan, you will be required to secure the loan with personal assets.
If you and another individual want to enter into a consultancy business together, this structure may be suitable for your business. All partners share in decision-making and are equally liable for the actions of other partners. As such, it’s critical that your business partner is someone you can trust and depend on.
Setting up a consultancy partnership will be relatively cheap and simple to run, and the key legal document you will require is a Partnership Agreement. There are also certain tax benefits for partnerships, such as each partner only paying tax on their share of the net income.
As mentioned, each partner equally shares the partnership’s liabilities. Consequently increasing your risk as there is no personal asset protection if the business can’t pay its debts. This is so whether or not you were the partner who incurred the debt.
A company business structure is especially common because of the ease of setting up a company, and the flexibility it allows. This type of structure will be well suited to your consultancy business if your aim is to grow and scale your business and become your industry’s biggest player. Directors have limited liability if the company falls into debt and becomes insolvent, and you have a wider range of capital options available.
If you run a consultancy business as a company, the debts your business incurs are debts of the company, not you personally. A company then protects your personal assets and shareholders to a certain extent. From this perspective, although the cost to set up a company may be higher than other business structures, the risk involved is much lower.
As a company director, you should know that business profits go back to the company and you can’t access these. The business can, however, pay you a wage as set out in your company constitution. The financial reporting requirements for companies are also very strict, and will increase your expenditure, for example from hiring an accountant and an auditor. You should weigh this and other expenses against the profits you foresee your business making before deciding to operate as a company.
Can I Change My Consultancy Business Structure?
You can certainly change your business structure, and you may find you need to expand your business and receive a higher return. Depending on the structure you start out with, there will be different levels of work and expense involved. You should discuss this with a business lawyer and your accountant first to find out what steps you need to take, and whether it is the best option for your consultancy business.
Before you commence your consultancy business, you need to consider the above business structures and work out what will be best for your business goals. Questions? Get in touch on 1300 544 755.