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Starting your own business as a makeup artist involves planning and preparation on many fronts. One of the key decisions you will need to make is what business structure you will choose.

You need to ensure that the business structure you choose:

  • is suited to your personal circumstances;
  • has the best long-term benefits; and
  • aligns with your current and future business goals. 

While you do have the ability to restructure your business in the future, it will be less complicated if you get this right from the start. This article provides an overview of four popular business structures that may be appropriate for your makeup business.

What is a Business Structure?

The structure of your business is the legal foundation of your business. It can impact your exposure to personal and financial legal obligations and your ability to grow your business. It will also impact your business’ tax treatment and have consequences for operational costs.

Types of Business Structures

There are four common business structures to choose from;

  • sole trader;
  • partnership;
  • company; or
  • trust.

Sole Trader

This is the simplest of business structures. If you on starting a business on your own, you may choose to operate as a sole trader. It is a very common structure for makeup artists to choose, particularly for freelance artists.

As a sole trader, you will have full control of the running your business. This structure is usually relatively easy and cheap to set up. It also has minimal legal requirements on set up. All you need is an Australian Business Number (ABN) and a business name if you plan to use a name other than your own.

Any profits of the business become your personal income (you pay tax as any other individual). But, you will get to keep any after-tax profits of the business.

As a sole trader, you’ll be personally responsible for any losses of your business. This means that your personal assets will be at risk if there is any debt or liability of the business. This type of structure is also not very flexible at accommodating a growing business. This is because you will personally need to fund any expenses from your savings or loans to operate the business.

Company

Another popular business structure you could consider is a company. A company may be advantageous if you plan to work on your own or with others. Under a company structure, you can provide freelance services or even operate a makeup studio. In this case, you would need to set up a company which is its own separate legal entity. This is so that it can hold assets in its own name and enter into contracts.

Companies have shareholders and directors. As the founder of your business, you will usually be both a shareholder and a director of the company.

The shareholders contribute funds to the company.  

The directors are the ones responsible for managing the company.  

Other business partners may also hold these roles with the company.

The set up of a company involves registration with the Australian Securities and Investments Commission, which comes with certain fees. You may need to register the company for:

  • an ABN;
  • a tax file number (TFN);
  • goods and services tax (GST); and
  • pay as you go (PAYG).

There are also ongoing annual costs to keep the company registered.

The key benefit of a company is that your personal liability is limited if your business gets into strife. Only the assets of the business, which are owned by the company, are at risk. This means that the most you would lose is the amount of money that you have invested in the company as a shareholder. Most of the time, none of your personal assets can be touched.

This structure is also beneficial as it allows for you to easily fund any future growth by the raising of additional money from shareholders. Also, companies are subject to lower tax rates than individuals. However, you should note that profits distributed to shareholders are generally subject to additional taxes.

This structure may be more appropriate for you if you’re a makeup artist looking to set up a studio. This is because you are likely to incur greater liabilities and debts than a freelance makeup artist.

Partnership

A partnership may also be a viable option if you plan to open a makeup studio with others. A partnership, like a sole trader, is simple to set up and has low set up costs. The partnership will need an ABN and is likely to need a business name. A partnership agreement will also be required to govern the relationship between you and your partners.

Similar to a sole trader, you will be personally responsible for any debt or liability of the business. However, in a partnership, you will also be responsible for debts that any of the other partners have incurred in the business.

For example, you will still be 100% for any debts even if you only hold 50% of the business.

A partnership also relies on the savings of the partners or other loans to fund the business. However, you can look to bring on new partners if you need to increase the funds available to the business.

Trust

Another option would be to operate under a tax structure. 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).

The trust may be a discretionary trust. This is where the trustee chooses which beneficiaries receive any income from year to year and in what proportions.

Otherwise, the trust may unit trust. Here, unitholders receive predetermined proportionate distributions of their income.

To set up a trust, a trust deed is generally required. In addition, the trust will need to be settled and stamped with the relevant state or territory revenue office. Further, the trust will need to register an ABN.

A trust may also require a:

Similar to a company, it also has asset protection benefits as any debts of the business can generally only be covered by the assets of the trust. Therefore, the beneficiaries are not personally responsible for any losses.

A trustee, however, is personally responsible for trust debts. This is why a corporate trustee provides an additional layer of asset protection compared to an individual trustee.

Despite the advantages outlined above, a trust presents limitations as it does not allow much flexibility for funding growth. With a trust, you will not generally raise funds from the public, so it will need to be funded by those setting it up or with loan funds. Also, a trust is required to distribute its profits each financial year to avoid a high rate of tax. This can be a problem for businesses wanting to retain profits in the business for future growth.

Key Takeaways

When starting a business, one of the first things you should consider is which business structure reflects your future goals. To come to this determination, you need to consider:

  • the type of makeup artistry business you want to run;
  • the level of risk involved;
  • your plans for future growth; and
  • whether you wish to involve others.

If you have any questions about business structuring or need assistance with setting up a business, get in touch with LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

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