No matter what stage of business you’re in, whether you’re starting out, growing, or reassessing, it’s imperative that you have the right business structure. It can help you minimise risk, reduce tax and increase profits.
But which one is right for you, and how do structures differ? Here are four common business structures you might consider.
Sole trader
Sole trader arrangements are a low-cost option for people starting out in business. Sole traders are responsible for everything that happens in their businesses, including 100 per cent of the business’s liabilities, which can be recovered from their personal assets. Sole traders declare their business income (or loss) as part of their personal income tax return and are taxed at the same rate as an individual. While a sole trader arrangement may be suitable at the start of your business journey, as you grow, take on more risk, or add other people to the business, you should then consider the other options available.
Partnership
A partnership is a bit like a sole trader with more than one person. When starting out with two or more people, a partnership can be attractive due to the low costs of setting up. A key thing to consider is that a partnership is not a separate legal entity. Generally, in a partnership, all partners will be equally responsible for the management and liabilities of the business. Usually, each partner will have unlimited personal liability for the debts and obligations of the business. If the partnership cannot meet its debts, creditors can seek to recover loss from the personal assets of one or more of the partners. This may mean that if one partner has more assets, they will bear the responsibility for the partnership’s loss. If one partner has limited personal assets and another owns their home for example, a creditor may recover some or all their loss by requiring that one partner to sell their home. It may seem like the last thing you want to do when starting a new business venture, however, it is prudent to consider what should happen if the partners want to part ways or are otherwise in dispute.
Company
Using a company structure can mean increased setup and ongoing costs, as well as more complex reporting requirements and administrative burdens. A company is said to have a ‘corporate veil’, which means that the company is a separate entity from the individuals behind it. A key benefit of this, which makes it the most popular business structure, is protection for those running the business. A company structure seeks to balance the interests of those behind the business, by encouraging growth while shielding the individuals from risk (by limiting their liability for business affairs). There are limited circumstances where those behind a business can have personal liability, and if you are setting up a company, particularly if you are to be a director, you should be aware of your duties and responsibilities.
Trust
A trust structure can also be implemented within a business. A trustee is responsible for the trust’s income and losses and can be an individual or a company. To maximise tax benefits, family businesses often use trusts to distribute income between members. Your business is held in trust by a trustee for the benefit of the beneficiaries. Trusts can be complex and require an initial trust deed to establish them.
It is important to explore your options when setting up your business to find the right structure for you. Importantly, discuss business structures with your accountant and lawyer, so you can make an informed decision about which will suit your specific needs.
