Setting up as a Sole Trader can be quite risky, and doesn’t provide you with a whole lot of room for your business to grow. If you do not want to set up as a sole trader, there are a few other options available to you.
The single company structure
An option is to set up a company and run your business through that one company. Let’s call this Company ABC, assuming you will be a shareholder and director.
Once Company ABC is properly incorporated, it then:
- trades on behalf of the business;
- enters into business contracts with suppliers, distributors, contractors, and other third parties;
- owns all the assets and assumes any liability on behalf of the business;
- owns all intellectual property of the business; and
- employs the employees of the business.
What are the advantages of this structure?
One of the main advantages of this structure is the limited liability that it provides to you as a shareholder and director.
Subject to some special circumstances, such as fraud for example, as a shareholder of Company ABC you usually have no legal or beneficial interest in the assets owned by Company ABC even if you own all of its shares. Accordingly, Company ABC, not you, is liable for the business’s contracts and torts, and acquires causes of action for breaches of contract and for acts of negligence that damage it. Your liability, as a shareholder of Company ABC, is limited to the amount unpaid on your shares.
The single company structure is also one of the simplest business structures. Under this structure, you are only required to set up one company, keep records for one company, have one set of accounts, and submit one Business Activity Statement.
What are the disadvantages of this structure?
As with any business structure, there are disadvantages. Having just the one company means that all valuable assets and intellectual property are held by this single entity. If the company runs into trouble, all of the assets and intellectual property it holds will be at risk.
There is also no benefit of tax-free dividends under this business structure. Using this single company structure means that all the dividends of Company ABC will be paid to you, as a shareholder, and you must pay tax on these dividends at the marginal rate.
This structure is simple to set up and gives you, as a shareholder and director of Company ABC, limited liability. This means that, unless special circumstances arise, you will not be personally liable for the debts and losses of the company. There are, however, some disadvantages in relation to the lack of asset protection and tax-free dividends which can be addressed by using a dual company structure which requires you to set up 2 companies: a holding company and an operating company. We will discuss this dual company structure in Part 2 of this series. Stay tuned! If you have any questions speak to a small business lawyer.