Starting a business is an exciting time in your life and it is common to want to rush into selling or providing your service without giving a consideration to the diverse range of legal requirements that you need to satisfy. The legal requirements of starting a business often possess as a real barrier for a lot of people with great ideas but, they don’t have to be. This article series aims to point out some of the key legal considerations you will encounter along the way to starting your business. In this article we will explore the vast array of business structures available to you and why you should take some time to choose a business structure that works for you and your business.
So why does a structure matter?
A business structure can be thought of as a foundation of your business. If you have a business structure in place from the beginning that suits your current and future needs, your business will be set up for success. In addition, the business structure you choose determines your:-
- Operational costs associated with record keeping and reporting;
- Tax liability associated with the business;
- Level of control over the business;
- Level of personal exposure to liabilities that arise;
- Status as an employee;
- Need for a separate bank account; and
- Responsibility for business decisions.
Due to the breadth of implications your choice of a business structure has, it is important that the correct structure is chosen for your specific business situation. The correct structure will allow for your business needs to be catered for leaving you to focus on your customers.
Which business structure suits you?
It is important that you have an understanding of your options There are four common business structures that this article will cover, however there are many more including co-operative, indigenous corporation, and joint venture.
The sole trader business structure is the most simple business structure available. As a result, it is low cost and easy to operate. The advantages of this structure generally include: –
- Low operational and reporting costs making the business easy to administer;
- You can use your individual tax file number;
- You will have full control over the business decisions made; and
- You will not require any separate bank accounts.
Whilst these elements make the sole trader structure administratively simple to set up, there are some drawbacks that you need to be aware of. The general downsides of a sole trader structure include: –
- Your personal assets are at risk due to unlimited liability;
- Profits and losses can not be split between family members;
- Your personal tax liability includes all income derived from the business;
A common misconception is that a sole trader can not hire people. This is incorrect. Sole traders are able to hire people and are bound by the same employment laws as other employers.
The company structure creates a separate legal entity giving it the same rights as a natural person including the right to sue and be sued and incur debts. As a result, company structures are often expensive and complex, however do let that deter you. There are a number of commonly attributed upsides that arise out of this complexity that may suit you and your business goals. These include:-
- Company members have limited liability if things go wrong providing protection;
- The company is a separate legal entity allowing it to sue and be sued;
- Business earning belong to the company, thus changing the rate of taxation on business income; and
- Wider access to capital is available.
These elements offer greater protection and improved barrowing capability whilst shifting the tax and legal obligations to the company instead of you. So, what is that catch? The downsides of a company structure includes: –
- A higher set up and running costs associated;
- Directors must comply with their obligations under the Corporations Act 2001;
- Higher administrative and reporting requirements including annual company tax return and directors to complete a declaration of solvency each year; and
- Company is owned by shareholders potentially giving you less control over business decisions.
The partnership structure is a simple and relatively inexpensive business structure. There are a number of types of partnership structures you can consider. These include a General Partnership, Limited Partnership, and Incorporated Limited Partnership. Each of these have differing levels of liability ranging from unlimited for General Partnerships too limited liability under limited partnerships and a mix of limited and unlimited in Incorporated Limited Partnership. There are a range of benefits that arise out of the partnership structure and include: –
- There are low reporting requirements when compared to a company structure and trust;
- There is flexibility in the level of exposure to liability depending on which structure is chosen; and
- You and the partners are the owners and as such have control over business decisions;
Some drawbacks of using one of the partnership structures includes: –
- The partnership does not pay income tax at the partnership level, rather it is paid at the partner level; and
- The partnership is required to submit a partnership tax return with the ATO.
Trust structures are a more complex and potentially more expensive business structure option. A trust structure utilises a Trustee which carries out business on the behalf of the trust members and or beneficiaries. The Trustee can be a person or a company. The Trustee is then responsible for the assets of the trust as well as income and any potential losses. Whilst the structure is complicated at face value, don’t let it completely deter you from its benefits. These include: –
- Assets are highly protected; and
- Business decision responsibility falls with the Trustee;
With the complexity does come a range of potential drawbacks that you need to be aware of before choosing to operate under a trust structure. These include: –
- Difficult can arise if you desire to dissolve the trust;
- The Trustee is required to undertake administrative tasks;
- Administrative expenses can be high; and
- Potentially high tax obligations.
In addition, the trust is also required to have a formal trust deed which details the operation of the trust. As a result, legal consultation is also required to correctly set up a trust.
Specific legal advice based on you and your business’s current and future needs may be required to ensure that the correct business structure is chosen from the very beginning. Contact the Robertson Hyetts team to help you get started on your business journey in Bendigo on 03 5434 6666 or in Castlemaine on 03 5472 1588.