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A quick guide to choosing the right business structure

The key features of each business structure

in Business Law by Eileen Nguyen on
A quick guide to choosing the right business structure

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:

  1. sole trader;
  2. partnership;
  3. company; and
  4. 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 Cons
  • Quick and easy to set up.
  • Complete control over the business.
  • Easy to change business structure later on.
  • 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 Cons
  • Easy to set up.
  • Limited reporting requirements.
  • 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 Cons
  • 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.
  • 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 Cons
  • The trust is responsible for the business’ debts, providing protection over personal assets.
  • Flexible asset and income distribution arrangements.
  • 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.

Our experienced lawyers can assist with the potential legal consequences regarding a business dispute. If you would like to enquire about a business dispute matter, simply get in touch online or call us on 1800 555 777 to find out where you stand.