Choosing the right business structure for your business

Choosing the right business structure for your business

Choosing the right business structure for your business is an important decision. Getting it wrong can have consequences for the business, as well as you personally. Your choice of business structure can also have significant impacts on safeguarding your business and personal assets, tax obligations and optimising your returns. Each business structure has advantages and disadvantages to consider. 

Sole traders and Partnerships

The simplest structure is that of a sole trader, followed by being in a partnership. Each are generally quite inexpensive to establish and maintain. Sole traders are in effect an individual operating a business in their own right, with unlimited liability against their own personal assets. A partnership is between two or more parties and as a general rule, each partner is jointly liable with the other partners for all business debts. Again, there is generally unlimited liability against personal assets. 

Companies and Trusts

Companies and trusts are often the preferred business structures for small to medium-sized businesses. A company is a separate legal entity and as such, is distinct from a natural person. This can offer significant benefits in terms of asset protection and potentially some tax benefits also. The company is controlled by directors, and the directors are appointed by the shareholders. Directors have certain obligations under the Corporations Act (which governs companies in Australia), but the liability of shareholders is usually fairly limited. 

Like a company, a trust can have the benefits of asset protection and potential tax benefits. Establishing a trust involves the trustee or trustees (whether individual/s or a company aka a ‘corporate trustee’) holding assets ‘on trust’ for the benefit of the beneficiaries of the trust.There are also different types of trusts, for example discretionary trusts (aka ‘family trusts’) and unit trusts amongst others. The type of trust set-up will often be determined by the nature of the industry the business operates in and the people involved in the control of, and/or investment into, the business. Unlike companies, trusts are not legal entities. Instead, a trust is a legal relationship between the trustee/s and the beneficiaries of the trust. 

Conclusion

Being in business can be very rewarding. However, obtaining good advice about your individual circumstances is important to ensure that you are in (or setting up) a business structure which is suitable for you and your business. Sitting down with a lawyer (and other professional advisors as required) is a sensible and pragmatic step to take to ensure that you understand some of the pitfalls to avoid in your business structuring decisions, and help better prepare yourself for long term success. If you would like to build a relationship with a law firm which takes a genuine interest in you and your business, then now is the time to get in touch. We recommend that in the first instance you discuss your situation with us in our SmartMove initial 30-minute discounted consultation (in person or by telephone), which we offer for just $80 and which can be booked through our website or by simply getting in touch. Austral Legal. Practical advice