Which business structure is right for you?
Business structuring is an important decision for all businesses. Whatever you choose will impact tax payment, business control and legal liability, so choosing a business structure is something that should be taken seriously.
There’s no one answer as to which structure is best. The right choice for you will depend on the nature of your business and your goals. However, to make an informed decision, it pays to know about the options.
The most common types of business structure
A sole trader is someone flying solo and chasing their own dreams. They have full control over business decisions which allows for flexibility and quick changes in direction. You are responsible for everything – including your core work, the admin, marketing, taxes and more. Although you are a sole trader, you can hire other people to help with the work when you need it.
Partnerships are similar to sole traders, but with more owners – from two to 20 in Australia. Business decisions are shared which can increase the expertise available but can slow down progress at times. Other advantages are that there are more hands to do the work and a greater source of capital to get things started.
Setting up a company is more complicated and expensive than other forms of business, but it brings many benefits. A company is different to sole traders and partnerships in that it’s a legal entity, which means it can enter into contracts, buy assets and is legally liable for business decisions – which protects owners and their personal assets in times of strife.
The two most common types are a discretionary (or family) trust or a unit trust. How you set up the trust changes the power structure, but both protect personal assets of members.
Although less common, there are two other business structures available in Australia:
Co-operative: an organisation that is owned by its members. Depending on how this is set up, members can be rewarded with payment but this isn’t necessary.
Incorporated association: as with a company, these are legal entities that protect their members. These are set up for not-for-profit organisations and have legal considerations such as the need for general meetings, a committee and to take minutes of all meetings.
How do I choose a business structure?
Whether you’re establishing your first business or think it is time for a re-structure, there are several important factors influencing business structure which you should consider.
The structure you choose for your business can have an effect on how much control you have over operations and the direction you take. For example, as a sole trader, you will be in control of all aspects of the business while those in a partnership have to come to agreements with all other partners.
Different business structures have different asset protection for their owners. For instance, more complex business structures, like companies, allow for greater asset protection than sole traders. As a sole trader, should difficulties strike, you may find that your personal assets are under threat.
As a rule of thumb, it’s much easier (and cheaper) to start up as a sole trader than as a company. Typically, the more complex the business, the more costly the setup. However, this shouldn’t be your only consideration. Sole traders and partnerships can be set up for free (although there may be associated costs such as business name registration).
When you set up a business you should consider both your current and future needs. While you can always restructure your business, it takes time and costs money, so choosing the right structure the first time is preferable. Consider expansion opportunities and future goals when choosing your business structure.
The way you structure your business changes the way that you are taxed. Each structure has its pros and cons, for example, a company pays tax but a partnership does not - instead a partnership distributes its income to its partners to pay tax on individually in their personal returns.
Structuring your business isn’t just about set up; an important consideration is your business’s ongoing administration. While a sole trader has little to worry about in future years, owners of a company have regular paperwork and costs they need to account for.
Continuity of existence
While no one likes to think of the end, it’s important to consider it. If you want to make the call on when your business ends, it’s easy for you to do that as a sole trader. However, if you want your business to be an ongoing entity, such as a family business, a structure that allows for continuation without your control may be a better option.
To find out more about business structures, download our latest ebook Business Structuring: An experts guide to getting started.