Structuring your startup
Choosing the right business structure is crucial. Consider costs, complexity, taxes, liability, and control. Options include sole trader, partnership, company, and trust.
Selecting the right business structure is one of the most crucial decisions to be made when starting a business. The choice of business structures can affect key aspects of your business such as tax, asset protection, setup costs, and personal liability. Although a business’ structure can be changed throughout its life, there can be complications and tax consequences from doing so. It is far more efficient to get the structure right from the outset.
When considering which structure may be best for your business, it is important to have regard to the following factors:
- complexity of setting up;
- tax obligations;
- legal obligations;
- administration and reporting;
- personal liability; and
- the level of control you have over the business.
The four main business structures to consider when establishing your startup are Sole Trader, Partnership, Company, and Trust.
The sole trader is the simplest form of business structure, being relatively easy and inexpensive to set up. A sole trader is legally responsible for all aspects of the business, including any debts and liabilities.
The advantages of a sole trader structure are as follows:
- simple to set up and operate;
- full control of assets and business decisions are vested in the owner;
- very few financial reporting requirements; and
- the owner is able to choose whether to pay super to themselves.
The unlimited liability of a sole trader, however, means that the owner’s personal assets are at risk in the case that something goes wrong. Further, the owner is personally liable to pay tax on all of the income derived.
A partnership is a business structure comprising two or more people who distribute income or losses between themselves.
Partnerships fall into one of three categories. In a general partnership, all partners are equally responsible for the management of the business, and each bears unlimited liability for the debts and obligations it may incur. A limited partnership is similar to a general partnership, but the liability of each partner is limited to the amount of money that they contributed to the partnership. This structure is typically used when passive investors, that is, investors who play no role in the management of the business are involved. Finally, an incorporated limited partnership is where partners can have limited liability for the debts of the business. There must, however, be at least one general partner with unlimited liability who, in the event that the business cannot meet its obligations, bears personal liability.
Partnerships are, in general, relatively simple and inexpensive to set up and have minimal reporting requirements. Where a partnership differs from a sole trader is in that partnerships require separate tax file numbers and must use an ABN for all business dealings. Further, partners share control and management of the business. The partnership must lodge its own tax return each year, but each partner is responsible for paying tax on their share of the net partnership income. The laws concerning partnerships differ from state to state in Australia.
A company, unlike a sole trader or partnership structure, is recognised by law as a separate legal entity. This means that a company has the same rights as a natural person and can enter into contracts, sue and be sued, and own property in its own right. The shareholders are not liable for the company’s debts and obligations, and their liability is limited to the amount of money they have invested in the company. Company directors however, may, in certain limited circumstances, be held personally liable if found to be in breach of their legal obligations, or directors’ duties.
Companies are highly complex business structures and are heavily regulated under Commonwealth law. If a company fails to comply with regularly changing Corporations law and ASIC regulations, the company may be subject to sanctions such as fines, penalties, and legal action.
It is highly advisable to seek legal advice if you are considering setting up a company.
Contact Warlows Legal today for a free consultation about setting up a company.
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