Sole trader, partnership, trust, or company? Getting this decision right can be the difference between your business being built upon a bridge to success, not a road to ruin.
Deciding on the best structure for your business is like an engineer designing a bridge.
You have to carefully take into account the traffic forecast (customers), the width of the river (foreseeable challenges), natural risks it could be exposed to (personal liability exposure), and importantly, where your funding will come from (capital).
And if you don’t get it right? Well, just like a bridge it can all come crashing down.
So here are the four main structures and how they differ from one another.
Sole trader
Many business owners begin as sole traders then explore their options as their business grows.
It’s the easiest and least expensive option to set up because there are few legal and tax formalities.
Additionally, it’s for business owners who want to control and manage their business alone.
That said, there are some major disadvantages.
This structure doesn’t give you much legal protection if things go wrong. This means that personal assets are unprotected from any claims arising from your business. So if you’re worried about losing your house, perhaps this isn’t for you.
Company
In choosing a company business structure you’re forming a legal entity which is then regulated by ASIC.
The upside is that company tax rates are almost 20% lower than the top personal tax rate. This structure also provides much better legal protection but it’s not perfect.
As shareholders, although the risks are largely limited to assets of the company, the directors of the company can face a few risks personally if the company doesn’t pay its taxes or super.
The main downsides? It’s costly to set up, there are additional record keeping requirements and other legal obligations.
Partnership
A partnership involves two or more people entering the business.
If you want to raise finance, there are great advantages, as more people are sharing the risk and contributing to the business.
Similar to a sole trader, the main disadvantage is that the personal assets (house, car, etc), are at risk as there’s no legal protection for partners.
Additionally, both partners are liable for the actions of the other. That means if your partner does something behind your back, you”ll both be on the hook for the consequences.
So how can you minimise the risks? Well, having a written partnership agreement can help but there’s a lot that you need to consider.
Trust
In a nutshell, a trust is a legal structure to hold assets for the benefit of your family (or other beneficiaries).
This structure can provide greater asset protection and can help minimise taxes. Also, like a company, it can limit potential risks.
A trustee carries out the business on behalf of its beneficiaries. You’ll need to choose whether you want a company or some individuals as the trustee/s. There’s advantages and disadvantage to both, but ask and we’ll step you through those.
The downside is that it’s subject to extensive regulation. That said, there’s greater flexibility on how the business’ income is distributed, which means you’ll potentially save quite a bit of tax.
Make sure you get it right
Understanding which structure is the best fit for you and your business is complex at best.
So if you’re just starting out, or considering changing structure, speak to us to ensure your business stays safely above troubled waters.
We can take into account all relevant information to ensure your business is structured in the the best possible way.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice.
