See what business structure is right for you
Building a new business? Set yourself up for success from the start by choosing the best business structure for your needs. Regardless of the industry you’re in, the way you structure your business will impact your operations (we’ll cover this later) in the short and long term. This could be good or bad! If you choose the wrong structure, the impacts can seriously impact the success of your enterprise…
So, what are the business structure options, and how can you choose the right fit? For most small businesses, there are four basic choices. Familiarise yourself with each of the four structures to determine which structure is best for your business.
Four business structures for a small business.
There are more than four business structures, however these are the most-widely used and appropriate options for small business owners.
1. Sole Trader.
A sole trader business is where one person owns, operates, and manages the business. This is a structure commonly used by small and microbusinesses, and a sole trader is not considered a separate legal entity. Examples include tradespeople, shop-owners, consultants, freelancers of any industry, and other small businesses with one main person running it.
As a sole trader, even though you are solely responsible for running the business, you can still hire employees. You do not need to pay superannuation and workers’ compensation to yourself as a sole trader.
2. Partnership.
Like the name suggests, a partnership describes at least two people who jointly own and manage the business — but not as a company. Each party contributes funding, labour, and skills to the business, sharing in the income and liabilities according to agreed ratios. This doesn’t necessarily have to be a 50/50 split, and the specifics are detailed in a Partnership Agreement to ensure all parties are on the same page. Like a sole trader, you do not need to pay superannuation and workers’ compensation to yourself in a partnership structure.
3. Trust.
Trusts are legal relationships where a person or persons (the ‘trustees’) hold property or income on behalf of a beneficiary or group of beneficiaries. Trusts are a common business structure for family-run businesses. The benefits include tax minimisation strategies, as well as succession planning opportunities to ensure the future of the business.
Paying superannuation and workers’ compensation to yourself is compulsory with this arrangement.
4. Company.
Companies are a legal entity in their own right, separate from their owners. A different tax structure applies, as well as different administrative requirements. Paying superannuation and workers’ compensation to yourself is compulsory with this arrangement.
How your business structure affects your business.
There are six main business areas that will be affected by how you structure your business:
- Finances including tax liabilities, superannuation, workers’ compensation, and so on.
- Legal controls and constraints.
- Administrative burden and costs.
- Asset protection.
- Personal liability for debts.
- Your ability to raise funds.
Now you know the options, but how do you decide?
To help you select the most suitable structure for your business, we’ve penned some questions for you to consider.
1. How big is the business you’re creating?
If it’s just you in the business (for the foreseeable future at least), its sole trader status will be most favourable. Remember, as a sole trader, you can still hire employees, but you’re solely responsible for running and managing the business. If you have rapid growth plans and require help to run and manage the business, forming a company or partnership may be better.
2. Can you handle a complex set up procedure?
The simplest and cheapest form of business structure to register is sole trader or partnership. They are generally quick and easy to set up. If it’s just you in charge of operating the business, you may want to avoid the complexities involved in setting up a trust or company.
3. How flexible do you need your business to be?
Sole traders enjoy greater flexibility when it comes to management and generally operate with fewer legal controls than companies, partnerships, or trusts. However, they have less flexibility with tax affairs, and there is no income-splitting option like there is with partnership, company and trust setups.
4. Do you want to keep admin and reporting simple?
If you’re considering a trust or company, the administrative and reporting requirements are more cumbersome than with a simpler sole trader set up.
5. How do you feel about accepting full liability?
Sole traders retain all the profits from the business (unlike with a partnership, trust or company) but they’re also responsible for all debts. This can increase the pressures of running the business, and even threaten your home and other personal assets if the business isn’t doing well financially.
Companies are more complicated and expensive to set up, but you won’t be solely responsible for debts incurred. Only the assets of the Company will be at risk, however it is possible for a director’s personal assets to be at risk if they are found to have acted negligently.
6. Will you need to raise capital?
“Capital raising” is when a company asks for money from investors. This money might be used for funding, expanding, or acquiring something. As a company, trust, or partnership, it’s relatively easy to raise capital. However, this becomes much more difficult as a sole trader (and usually isn’t necessary anyway), so you will generally have to rely on savings, home equity or family loans.
7. How much control do you want in the business?
As a sole trader, you have total control over all business decisions. As a partnership, trust, or company, decision-making must be a shared responsibility. It’s not uncommon for business owners to start as a sole trader and then evolve into a more complex structure over time — and the business owner struggles to relinquish control. This causes tension within the company, trust, or partnership. While some business owners want full control, others enjoy knowing that responsibilities are divided and shared. So, what resonates better with you?
So, what happens if you choose the wrong business structure?
It’s annoying, but it’s not the end of the world. You can change your business structure if your circumstances change or if you think you’ve made the wrong decision. However, obviously it pays to opt for the most suitable structure from the start, which is why we suggest engaging a third party to help you with your decision. Changing from sole trader to another structure is relatively simple but changing from a partnership, company, or trust is more complicated.
Get expert advice before you start your business.
Always seek specialist advice before making your final decision. If you want to chat through your options,
contact Ascent Accountants today. We specialise in
business set up and know the different business structures inside-and-out. We’ll be happy to talk through your options, go over the pros and cons of each, and help you land on the best structure for your business needs. We also do it while considering any
business growth plans, so your business is set up for success now and in the future.
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