While starting a business, one of the major factors you should consider, is to decide upon a suitable business structure. The structure you choose depends on the size and type of your business. There are four main types of business structures namely:

Sole trader;

Partnership;

Company; and

Trust.

 

Sole Trader

 

A sole trader is the simplest form of business structure. Here, the individuals trade on their own or can use a registered business name under the Australian Securities and Investments Commission (ASIC).

 

Advantages of Sole Trading

Operates in a simple set up;

Complete control asserted on the business by the trader; and

Fewer reporting requirements.

Disadvantages of Sole Trading

Unlimited liability, which means the personal assets of the individuals are at risk, if the things go wrong; and

Little opportunity for tax planning.

Partnership

 

A partnership is considered to be an association of 2 or more persons, but not more than 20 people, who join to run a business together. The partners may either use a registered business name under the ASIC or may use the family names of all the partners.

 

Advantages of Partnership

Simple inexpensive set up;

Minimal reporting requirements;

Shared management and staffing responsibilities;

Combined skills, experience and knowledge providing a better product/service;

More opportunities for tax planning;

Relatively easy to dissolve or exit and recover share; and

Access to capital.

Disadvantages of Partnership

Each partner is responsible for the liabilities and debts incurred by other partners with or without one’s knowledge; and

Disputes may occur over profit sharing, administration control and business direction.

Company

 

A company is a legal entity capable of holding assets in its own name and conducts a business in its own right. A company is owned by the shareholders and run by the directors. It has a unique nine digit Australian Company Number (ACN) appearing on company seal and every on public document.

 

Advantages of a Company Structure

Limited liability for shareholders;

Company structure is commercially accepted;

Ability to raise significant capital;

Profits can be reinvested in the company or paid out to the shareholders as dividends;

Easy to sell and pass on ownership; and

Company can carry forward losses indefinitely to offset against future profits.

Disadvantages of a Company Structure

Significant set up costs and maintenance costs;

Limited or no control of company affairs;

Complex reporting requirements; and

Company cannot distribute losses to its shareholders.

Trust

 

A trust is an entity that holds property or income for the benefit of others. In a trust, a trustee operates the business on behalf of the beneficiaries. It is set up through a trust deed and comprises of:

Discretionary Trusts (involving single family); and

Unit Trusts (involving multiple families).

Advantages of a Trust

Reduced liability, in case of corporate trustee;

Asset protection; and

Flexibility of asset and income distribution.

Disadvantages of a Trust

Can be expensive and complex to establish and administer;

Difficult to dissolve, dismantle, or make changes once established, particularly when children are involved;

Any profits retained to reinvest into the business, will incur penalty tax rates; and

Cannot distribute losses, only profits.

 

Each structure has advantages, disadvantages and responsibilities. One needs to carefully consider them before making a decision. If you would like to seek any guidance in relation to the different types of company structures, feel free to contact our team of experts at Owen Hodge Lawyers.

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