The structure of your business will have a flow-on effect to multiple facets of your operations; from hiring employees to having the ability to scale up as your business grows.
Choosing a business structure will depend on the size of your business, the type of business and how you would like it to operate. The structure will have an impact on key areas such as tax obligations, asset protection and costs to establish your business.
We like to think of your business structure as akin to the foundational frame of a house. Once you’ve put a structure in place and started building the house, it’s difficult to turn back and restructure.
Setting up your business correctly from the beginning is much easier and less stressful. As your business starts growing, it could get very complicated to change your structure. This could cost you valuable business opportunities in the long run, for example, if you suddenly find opportunities to scale up but get held up by business structure issues.
You’ve got three main structures to choose from, all of which you’ve likely heard of
somewhere before:
- sole trader;
- partnership;
- company; or
With a fourth option being a trust.
You can change structures to accommodate your business’s growth, but changing legal structures can often be very complex. Therefore, it is essential to think carefully when choosing the right structure for your business to ensure it best reflects your future goals.
Types of Different Business Structures
We’ve summarised some of the key differences between sole traders, partnerships and companies below.
Sole Trader
Sole Trader is the simplest of the available business structures. As a sole trader, you manage and operate the business under your name. Such a structure is cheap and easy to set up. However, it is not very flexible and will generally not easily support a growing business. The sole trader structure is most suitable for contractors, tradies, home businesses, and/or online small businesses. In fact, the majority of small business owners in Australia are sole traders.
Partnership
A partnership is an association of two or more people who carry on business as a partnership. Setting up a partnership structure is simple and relatively cost-effective. However, there are several disadvantages to the structure. Like a sole trader structure, partners are jointly responsible for the debts of the business. Therefore, it is crucial to consider who you enter into a partnership with, as all partners are equally liable for the other partners’ actions. A partnership should have a partnership agreement in place, which sets out how the partnership operates.
Company
A company structure is ideal when you are looking to grow and scale your business. A company is its own legal entity. Therefore, individual shareholders are only liable for debts or liabilities that the company incurs up to the amount unpaid on their shares (which is commonly zero). This limited liability makes the company structure suitable for high-risk businesses. The ability to raise capital and grow via the issue of shares makes the company structure the most suitable for startup businesses. The Corporations Act regulates companies who must abide by their statutory obligations and Constitution or Replaceable Rules.
Researching and making decisions about your business structure can be confusing, especially if you’re not familiar with the terminology. The Australian government provides lots of information on this topic online. However, even if you’ve done your homework, it’s always a good idea to seek professional help. Your business might determine your livelihood, so it’s not something to mess around with.
The team at Clearpoint Legal can explain the potential implications of each option and guide you with your choice. Book a free discovery call today to learn more!
