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Overview

One of the most important decisions to make when starting a new business venture is deciding on the structure of the business – this sets the foundation for how the business will be operated.

The most common business structures are:

  • Sole trader
  • Partnership
  • Company
  • Trust

Each business structure has its own legal ramifications so this decision should not be made lightly. It can also be costly to change business structures later on down the track.

Which structure?

The below table highlights some (but not all) of the key features of each business structure which will help to quickly narrow the options:

Sole trader

An individual personally owns and operates the business.

Pros

  • Quick and easy to set up.
  • Complete control over the business.
  • Easy to change business structure later on.

Cons

  • The business owner is personally responsible for the business’ debts meaning personal assets are at risk.
  • The business’ income is taxed at the business owner’s personal income tax rates which may not be ideal if the business owner also receives other income

Partnership

A number of people (called partners) own and operate the business.

Pros

  • Easy to set up.
  • Limited reporting requirements.

Cons

  • Difficult to add or remove partners or change business structure later on.
  • Each partner is personally responsible for the business’ debts meaning personal assets are at risk

Company

The company has its own separate legal identity from the owners:

  • shareholders own the company and business;
  • directors oversee and manage the business operations.

Pros

  • Simple process to change shareholders and directors.
  • The company is responsible for the business’ debts, providing protection over personal assets.
  • Companies are taxed at the corporate rate, which is currently lower than the current higher income tax brackets for individuals.

Cons

  • Complex and costly to set up.
  • Significant reporting requirements.
  • Directors owe various duties to the company (called directors’ duties) and may be personally liable to claims by the company or third parties if they breach their duties

Trust

A trust is created by a trust deed (an agreement). Under the trust:

  • the beneficiary(ies) may be entitled to the trust’s assets or income (depending upon the terms of the trust deed);
  • the trustee operates the business and holds the trust’s assets for the benefit of the beneficiary(ies).

Pros

  • The trust is responsible for the business’ debts, providing protection over personal assets.
  • Flexible asset and income distribution arrangements.

Cons

  • Complex and costly to set up.
  • Significant reporting requirements.

While the above table will help to identify appropriate business structures, business owners should obtain accounting, business and legal advice to ensure they have selected the best business structure for their circumstances.

The contents of this blog post are considered accurate as at the date of publication. However the applicable laws may be subject to change, thereby affecting the accuracy of the article. The information contained in this blog post is of a general nature only and is not specific to anyone’s personal circumstances. Please seek legal advice before acting on any of the information contained in this post.

Thank you for your feedback.

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