While starting a business, one of the major factors you should consider, is to decide upon a suitable business structure. The structure you choose depends on the size and type of your business. There are four main types of business structures namely:
Sole trader;
Partnership;
Company; and
Trust.
Sole Trader
A sole trader is the simplest form of business structure. Here, the individuals trade on their own or can use a registered business name under the Australian Securities and Investments Commission (ASIC).
Advantages of Sole Trading
Operates in a simple set up;
Complete control asserted on the business by the trader; and
Fewer reporting requirements.
Disadvantages of Sole Trading
Unlimited liability, which means the personal assets of the individuals are at risk, if the things go wrong; and
Little opportunity for tax planning.
Partnership
A partnership is considered to be an association of 2 or more persons, but not more than 20 people, who join to run a business together. The partners may either use a registered business name under the ASIC or may use the family names of all the partners.
Advantages of Partnership
Simple inexpensive set up;
Minimal reporting requirements;
Shared management and staffing responsibilities;
Combined skills, experience and knowledge providing a better product/service;
More opportunities for tax planning;
Relatively easy to dissolve or exit and recover share; and
Access to capital.
Disadvantages of Partnership
Each partner is responsible for the liabilities and debts incurred by other partners with or without one’s knowledge; and
Disputes may occur over profit sharing, administration control and business direction.
Company
A company is a legal entity capable of holding assets in its own name and conducts a business in its own right. A company is owned by the shareholders and run by the directors. It has a unique nine digit Australian Company Number (ACN) appearing on company seal and every on public document.
Advantages of a Company Structure
Limited liability for shareholders;
Company structure is commercially accepted;
Ability to raise significant capital;
Profits can be reinvested in the company or paid out to the shareholders as dividends;
Easy to sell and pass on ownership; and
Company can carry forward losses indefinitely to offset against future profits.
Disadvantages of a Company Structure
Significant set up costs and maintenance costs;
Limited or no control of company affairs;
Complex reporting requirements; and
Company cannot distribute losses to its shareholders.
Trust
A trust is an entity that holds property or income for the benefit of others. In a trust, a trustee operates the business on behalf of the beneficiaries. It is set up through a trust deed and comprises of:
Discretionary Trusts (involving single family); and
Unit Trusts (involving multiple families).
Advantages of a Trust
Reduced liability, in case of corporate trustee;
Asset protection; and
Flexibility of asset and income distribution.
Disadvantages of a Trust
Can be expensive and complex to establish and administer;
Difficult to dissolve, dismantle, or make changes once established, particularly when children are involved;
Any profits retained to reinvest into the business, will incur penalty tax rates; and
Cannot distribute losses, only profits.
Each structure has advantages, disadvantages and responsibilities. One needs to carefully consider them before making a decision. If you would like to seek any guidance in relation to the different types of company structures, feel free to contact our team of experts at Owen Hodge Lawyers.
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