Starting a business from scratch is no easy task – but the potential rewards can make it all worthwhile. And one of the most important decisions you’ll have to make early on in the process is which business structure is right for you.

So, what are your options?

Sole trader

 Going solo is the simplest and least expensive way to structure your business. With no one to answer to, you’re in direct control and everything belongs to you.

While running your business any way you see fit is a big advantage, there is one major legal drawback to this structure. Namely, unlimited liability. This means the buck stops with you should things go wrong. Creditors can make a claim against your personal assets and should someone sue the business – it’s you who ends up in court.

Advantages:

  • Easy and inexpensive to set up with little legal admin
  • Ongoing admin costs are minimal
  • Have direct control over the business and assets
  • Can change structure easily when your business grows

Disadvantages:

  • Personally take on all liabilities and risk from the business
  • Personal assets are at risk
  • Have to pay tax on all profits – which can quickly push you into the top marginal rate
  • Little protection should things go sour

 Partnership

 As the name suggests, in a partnership you share ownership and control of the business with one or more people. All costs, profits or losses are distributed among the partners, though the business does require its own tax file number. Like sole traders, partnerships are relatively inexpensive to establish and require little ongoing costs to maintain.

While you don’t need a partnership agreement to get up and running, having one in place setting out the terms of the business relationship is strongly advised.

However, partnerships are not separate legal entities – so, once again, your personal assets could be claimed should you or any of your partners incur business debts or make bad decisions. So, it’s wise to only partner with people you know well and trust.

Advantages:

  • Relatively simple and inexpensive to set
  • Minimal reporting requirements
  • Allows for a combination of skills

Disadvantages:

  • Jointly liable for any debts and liabilities (regardless of which partner is responsible)
  • Personal assets are at risk
  • Little protection should things go sour

 Company

 Unlike sole traders and partnerships, a company business structure is a separate legal entity. This gives them the same legal rights as a person in that they can own assets, enter into contracts with third parties, run up debt, sue and be sued. This means you have limited liability so your personal assets are protected if the company incurs any losses. A notable exception to this rule is if a company director is in breach of their legal obligations – in which case they can be held personally liable.

However, a company is a more complex legal structure, so establishing and maintaining it is no walk in the park. You have to register with the Australian Securities and Investments Commission (ASIC) and comply with reporting requirements, including initial establishment, regulatory and compliance costs. Additionally, company officers and directors need to comply with their legal obligations under the Corporations Act 2001.

Advantages:

  • Limited liability
  • More attractive to investors
  • All profits are taxed at one tax rate

Disadvantages:

  • Higher set-up and running costs than other structures
  • Complex to establish and maintain
  • Additional legal and financial reporting obligations

 Trust

 You can also use a trust structure to run a business. In this case, the business is transferred to a person or a corporation (the trustee) who is given legal control over the business. The trustee distributes income and/or capital to the beneficiaries as per the terms of the trust deed. A trust does not need to be registered with ASIC but it does require its own tax file number. It is also not a separate legal entity, rather a relationship between parties.

If the trustee is an individual, they are personally liable if the trust incurs losses. However, if the trustee is a corporation, its shareholders have limited liability through the company structure. Beneficiaries of a trust are generally not liable for trust debts.

Trusts can be complicated and expensive to set up and maintain. You will also be charged a penalty tax rate should you want to leave profits within the business to help it grow, rather than distribute them.

Advantages:

  • Can have tax benefits
  • Can offer asset protection

Disadvantages:

  • Can be expensive to set up and operate
  • Can be difficult to dismantle
  • The trustee has annual admin responsibilities
  • Expensive to scale your business

 Blaine Hattie is a commercial lawyer who assists clients with start-ups and small business.

Get the right advice by speaking with Sutton Laurence King Lawyers. Call us on 03 9070 9810 or email us on info@slklawyers.com.au

Sutton Laurence King Lawyers articles are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Persons listed may not be admitted in all States and Territories.