Choosing the right business structure for your new venture can be a daunting task, but as a budding entrepreneur this is one of the first and most important decisions you will have to make.
The decision you make and the business structure you choose will affect your ability to raise capital and increase assets, it will impact your tax rates as well as the amount of liability you face.
Your choice will determine how you register your business and the laws by which you must abide.
When selecting a business structure you must analyze your personal situation and ask yourself some fundamental questions such as:
- What kind of product or service are you offering?
- Do you need state or country wide recognition?
- Are you prepared to deal with legal squabbling in an effort to get your business going?
- Are you planning on enlisting investors and venture capitalists or are you using personal funds?
- Do you wish to keep your personal assets separate from your new business?
- How do you deal with bureaucracy, paperwork and government formalities?
- How do you wish to handle taxes?
- Will you have partners and if so how will the responsibility be split?
- Do you plan to sell the company at any point?
- Do you plan to take your company public?
- How important are fringe benefits to you?
Knowing the answers to the above questions will help you pick the best structure, however such a critical decision should not be made without a personal consultation with an accountant or lawyer.
Most likely you will choose one of the following business structures as they are the most common choices for Australian entrepreneurs:
Business Structures in layman’s terms:
Sole Proprietorship- an individual trading on their own.
Partnership – when there are two or more people involved in running a business (not a company), with a goal to profit. The partnership can operate under personal names or under a registered business name.
Trust – a structure where a trustee, which can be either a company or an individual, carries out the business on behalf of the members (or beneficiaries) of the trust.
There is a range of trusts including:
- Discretionary trusts / Family trust – Where the trustee has the discretion when distributing funds to the beneficiaries.
- Unit trust – Where unit holders have a number of units in the trust. Distribution from the trust is on the basis of the number of units held.
- Hybrid trust – this is a combination of a unit trust and a discretionary trust.
Company – a legal entity separate from its shareholders.
Two common types of companies are:
- A proprietary company- Has no more than 50 non-employee shareholders and is generally not permitted to offer shares or securities to the public. It must have at least one shareholder and one director, and at least one director must ordinarily reside in Australia.
- A public company- May have more than 50 non-employee shareholders, can offer shares and securities to the public, and may seek listing on the Australian Stock Exchange.
There are numerous advantages and disadvantages to each business structure.
Business Structures pro’s and con’s in short:
- Simple and cheap to set up
- Can operate under your own name
- You control all business decisions
- All profits are yours
- If profits are low, there are tax benefits
- A great deal of personal duty and accountability
- Your capital is limited to your own assets (unlimited liability)
- All debts incurred are your own responsibility
- It can be difficult to sell ownership
- If profits are high, there are tax disadvantages
- Simple and cheap to set up.
- More start up capital
- A pool of skills and knowledge
- Profit belongs to you and your partner/s
- Reduced individual burdens
- Potential for disagreements
- All debts incurred, even by a partner are your own responsibility (unlimited liability)
- Personal assets are at risk
- Profits must be shared
- If profits are high, there may be tax disadvantages
In the case of a partnership we recommend forming a formal partnership agreement.
- Fewer formalities than running a company
- Substantial tax benefits
- Relatively simple to wind up a trust
- Assets are protected
-Trusts allow flexibility of asset and income distribution
- Reduced liability
- A complex structure with a technical establishment procedure
- A trustee is difficult to dissolve or to make changes to once it has been established
- Distribution of tax losses
- Establishment and administration costs can be quite high
You can set up a trust here
- A company is a separate legal entity from its owners
- Shareholders hold limited liability
- The company tax rate of 30% is much lower than the marginal tax rate for individuals of %45
- You can own property in the name of the company
- A company can be owned and operated by only one director and one shareholder
- A company business structure makes raising capitol easier
- A company is easy to sell
- Establishing a company can be quite technical
- Establishment and administrative costs can quickly add up
- Shares may be difficult to sell if you are a sole shareholder
- Minority shareholders may have little say in the companies affairs
- Ongoing company compliance regulations must be kept up with
- A company cannot distribute losses to its shareholders
You can register a company at Shelcom.
If you are unsure which business structure is right for your particular situation, please take 60 seconds to complete Shelcom’s Business Structure Wizard. The Wizard is designed to help guide you in the right direction for your new structure.
Guest post written by Gosia Slotala an expert in business name registration at Shelcom Corporate Services, a corporate service provider helping Australians set up in business since 1987.