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:
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.
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.
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.
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.
Acquisitions And Divestments Of Commercial And Industrial Properties
Businesses Outsourcing and Exporting
Reviewing Chinese Product Disclosure Statements
Types Of Business Structures
Business Sale and Purchase
Franchising Your Business In Australia
How To Secure Your Loan, Credit Or Goods
Joint Venture Agreements
Land and Environment Laws Particular To Developers
Self-Managed Superannuation Fund
Trusts and Trust Deeds
What to Know in Construction Contract