Starting your own business can be both exciting and time consuming. There are many aspects of starting a new business that must be researched and many decisions that must be made. One of the most important decisions you will make is how you will want to structure your business to protect your assets, both personally and with regard to the business you are starting.
There are four main ways in which you can structure your business. Each one presents both benefits and drawbacks depending upon your personal and business needs. These four main business structures include;
- Sole Trader
- Corporation
- Partnership
- Trusts
Sole Trader
The benefits of setting up a sole trader can be very enticing for a new small business owner. First, a sole trader does not require complex business structuring. This option allows you to simply go into business as an individual. When using this business format, you may have minimal startup costs and you will not have the costs that come with a structured business plan required by a corporation or partnership or a trust. In addition, you will have various tax advantages that you can use to ensure the success of your venture. One of these advantages has to do with capital gains taxes. However, when it comes to gaining a full understanding of the tax advantages of being a sole trader, we highly recommend you speak with a tax professional. Lastly, your legal obligations prior to starting your business will be minimal. However, the key factor to keep in mind is that as a sole trader you will remain personally liable for the entirety of your business. This includes debts incurred and contracts entered into on behalf of the business. As such, there will be no separation between you as an individual and you as the business owner.
Partnership
A partnership is the next least complex business entity to choose to create. While it is not quite a simple as a sole trader, it is not as complex as setting up a corporation or a trust. A partnership is considered a moderately complex legal entity. It may require you to seek proper legal advice for its creation, however beyond that it is less likely to need ongoing legal supervision. If you are working with another individual, this can be a great way to set up a business that allows you to share in the responsibilities of the business, the cost of doing business and the liabilities of the business. However, it must be noted that a partnership is not considered a separate legal entity. Therefore, the partners do remain personally liable for the actions of the partnership, itself.
Unlike a sole trader which can only take on one particular format, a partnership can include limited liability partners. These are individuals who are partners but, their liability is limited to the value of their contribution to the partnership. On the positive side this limits their personal liability significantly. However, it also tends to mean that a limited liability partner has little to no control over the management of the business, overall.
Corporation
Setting your business up as a corporation is more complicated than being a sole trader. A corporation can take a variety of forms. Some of those forms include;
- C Corporation
- S Corporation
- Limited Liability Corporations (LLC)
Each of these formats is slightly different from the other, however they all have certain characteristics in common which are;
- They are business that are created in accordance with, and conforming to, state law
- There are shareholders
- A Board of Directors is chosen
- They are separate and distinct legal entities
- The corporations are legally liable for the corporation’s actions including debts, contracts etc.
- The shareholders and Board of Director’s personal assets cannot be reached via a lawsuit against the corporate entity
Corporations are more complicated to set up and do require the assistance of a legal team that is familiar with all of the requirements for properly setting up and registering a corporation to do business. Therefore, it is not recommended that a person wanting to set up a corporation attempt to do so without proper legal assistance.
Trusts
Setting up a business via a form of Trust, is the most complex manner in which a business can be structured. Any form of a Trust structured business will require the expertise of a solicitor and other appropriate financial advisors. Setting up a business via a trust will require the following;
- The naming of a trustee
- The identification of beneficiaries of the trust
- The drafting of a formal trust deed
- Possible registration with the Australian Securities and Investment Commission (ASIC)
- A determination regarding the Trusts revocability or irrevocability
However, as with a corporation a trust is a legal entity the liability is limited via the existence of a corporate trustee. It is not recommended that structuring your business in the form of a Trust be undertaken lightly or sans legal counsel.
In the event that you find yourself in need of assistance, please contact the law offices of Owen Hodge Lawyers. At Owen Hodge, we are always happy to assist clients in understanding the full ramifications of any and all of your legal needs. Please feel free to call us at your earliest convenience to schedule a consultation at 1800 770 780.