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Setting up your business for success

One of the most important parts in setting up your business is choosing the 'right' or the most appropriate business structure for your business. In Australia, there are a handful of basic structures* to consider and this article is a brief review on those structures and their respective advantages and disadvantages.

*Structures not discussed in this article are 'cooperatives' and 'associations'.

Sole Trader

A sole trader is the simplest business structure - basically a person trading on their own under their own name or under a registered business name. The advantage of being a sole trader is that it is simple and therefore requires less administration. The disadvantages of being a sole trader is that it offers no asset protection (ie, the sole trader is personally responsible for all debts and liabilities of the business), and the sole trader is subject to the personal tax rate. The sole trader structure is generally more appropriate for smaller and less complex businesses, or businesses with a low turnover.

Partnership

A partnership is a business of two or more people, trading under their own names or under a registered business name. The advantages of a partnership over a sole trader is that in a partnership different people contribute towards the same business. The disadvantages of a partnership is that it not only offers little asset protection, but the partners of the business can be personally liability for all debts and liabilities of the partnership. Partners to the partnership are also subject to the personal tax rate.

Proprietary Limited Company

A company is a separate legal entity. The shareholders or members of the company own the company, and directors manage the company. In Australia, a company can now have just one director and one member. The advantages of a company is that as a separate legal entity, the company's liability is separate to the liability of its members and its directors (subject to the actions of the directors). Member liability is limited to the value of their shares. Also the company tax rate is different to the personal tax rate. The disadvantages of a company is that it is a more complex structure than a sole trader or partnership, and generally this results in higher administrative and compliance costs. Directors are also subject to various obligations at law and it is very important for directors to fully understand their director duties.

Trust

A trust is a business structure, generally used for tax or asset protection purposes, in which a person or company, known as a 'trustee' operates the business on behalf of other people or companies, known as 'beneficiaries'. Although the business is registered under the name of the trustee, the trustee does not actually own the business. The trustee is generally responsible for distributing the income of that business to the beneficiaries - and that distribution may be on a unit basis if it is a unit trust, or on a discretionary basis if it is a discretionary or family trust. The advantages of a trust is that it offers asset protection and tax advantages with income distribution. The disadvantages of a trust is that it is a complex structure generally incurring higher administrative costs. It is also important for the trustee to fully understand their responsibilities and obligations towards the trust under the law.

What is the most appropriate business structure for your business?

Unfortunately, there is no simple answer - and so the right advice is invaluable. If you are in the process of setting up a new business, or considering re-structuring your existing business, you should seek professional advice from your lawyer or accountant as to the most appropriate business structure for your business.

What should you do now?

At PHANG LEGAL, our commercially minded lawyers are experienced with providing advice and assistance to new and well established businesses. If you seek practical and cost effective solutions that meet your business needs, then you must call us on +61 2 9687 8885 to discuss how we can best assist you or visit our website at www.phanglegal.com.au for more information regarding our practice.