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If you are planning to start a consulting business, you need to determine how best to structure your business to meet your commercial needs. The 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. 

Importantly, you want 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, this article will step you through three business structures and their key features.

Sole Trader Consultant

If your consultancy business consists of just yourself, a sole trader would be a logical business structure for you to choose. It is also cheap and easy to set up. For example, you are not required to create a separate bank account and obtaining an Australian business number (ABN) is free. Likewise, any business revenue you make will be your personal income and you will be taxed as such. This also means that you do not need to complete additional tax returns.

However, this business structure will not provide you with much flexibility and opportunity for growth. Indeed, you should consider your long-term business goals in this regard. 

Another consideration is that you are personally liable for your business debts. Hence, if you raise revenue via a loan, you will need to secure the loan with personal assets. One final consideration is that you are responsible for organising your own superannuation. As you are not an employee of the business, you do not get paid annual leave or sick leave.

Consultancy Partnership

If you and another individual want to enter into a consultancy business together, a partnership 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 is 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. The key legal document you will require is a partnership agreement

Additionally, the greatest advantage over the sole trader structure is having additional capital from both parties to set up the consultancy business as well as having an increased borrowing capacity. There are also certain tax benefits for partnerships, namely that each partner only pays tax on their share of the net income.

Importantly, each partner equally shares the partnership’s liabilities. Consequently, this may increase your risk as there is no personal asset protection if your business cannot pay its debts. This risk will impact you whether or not you were the partner who incurred the debt.

Consultancy Company

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 you aim to grow and scale your business and become your industry’s biggest player. Likewise, 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 can protect 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.

Smaller consultancy businesses that have less than $10 million aggregated turnover are eligible for various tax concessions as well.

As a company director, you should know that business profits go back to the company and you cannot access these. However, the business pays 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, you will need to spend money when 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?

As a consultant, you can certainly change your business structure. Indeed, you may find you need to expand your business and receive a higher return. Some reasons to change your structure might include:

  • taking on a business partner;
  • purchasing an existing business; 
  • wanting to reorganise cashflow;
  • profitability or internal operations; 
  • expanding your market; or 
  • downsizing. 

Depending on the structure you begin with, there will be different levels of work and expense involved. You may need to apply for a new ABN, dissolve your partnership, draft new agreements, and consider different tax obligations. 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.

Still need help deciding? Try out the Business Registration Service’s business structure tool.

Key Takeaways

Before you commence your consultancy business, you need to consider what business structure will best support your business goals as a consultant. On one hand, if you are a part-time consultant, working by yourself, a sole trader would be the best way to structure your business. Alternatively, if you have large plans to expand your business, a company structure is a good idea. 

For more questions on choosing the best structure as a business consultant, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What is a sole trader?

A sole trader is a business run by an individual. If you set up as a sole trader, the law considers that you and your business are the same rather than separate entities. This means that you will completely own and control the business and receive all the income and profits from the business.

Can I change business structures from a sole trader to a company?

Yes. The first step is to register your company by lodging an application through the Australian Securities and Investments Commission (ASIC). If ASIC approves your application, you will receive an Australian Company Number. You should then cancel your sole trader Australian Business Number (ABN) and apply for an ABN in the company’s name.

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