Start Strong, Choose the Right Business Structure for Your Startup

Thinking of starting a business? One of the first administrative steps is to decide upon your business structure. The business structure you choose will impact upon your startup costs, how much tax you pay, your personal liability, your control over the business and ongoing administrative expenses. Start on the right foot by seeking legal advice. In the mean time, here is some information to help you understand the advantages and disadvantages of the four most common business structures in Australia.

Sole Trader

As a sole trader you will be legally responsible for all aspects of the business. You will be responsible for any debts, losses and liabilities.

Pros:

  • Most simple and inexpensive business structure to setup and operate- doesn’t require a separate Tax File Number or bank account.
  • You are in full control of the business.
  • Easy to change the business structures down the track.

Cons:

  • You will be personally liable for any risks incurred by the business.
  • Your assets can be seized to recover debt.
  • You will be taxed at personal rates.

 

Partnerships

A partnership involves 2 to 20 people jointly operating the business. Choose your partner(s) wisely as you will be jointly liable for any debts, losses and liabilities incurred in the course of business.

Pros:

  • Fairly simple and inexpensive structure to setup.
  • You and each of your partners pay tax on the share of the net partnership income you each receive.
  • Flexible – a partnership agreement can vary the allocation of profits and losses.
  • Easy to change the business structure down the track.

Cons:

  • You will be personally liable for any risks incurred by the business. Your assets can be seized to recover debt.
  • Requires a separate Tax File Number.
  • You are not in full control of the business.
  • You must be registered for GST if the annual income turnover is $75,000 or more.

 

  • Ensure your partnership is protected with a written partnership agreement

A partnership agreement is a formal contract that covers:

  • The initial and ongoing contributions of partners
  • The liability of each partner
  • The distribution of profits between partners
  • What will occur in the event of one partner exiting the business
  • How the income or benefit will be paid out to partners

 

Company

A company is a separate legal entity. A company can incur debt and contract with third parties. It can sue and be sued. A company structure will enable you to limit personal liability but this will come with a greater administrative burden. Most serious startups will opt for a company structure.

Pros:

  • Limited liability – the owners (shareholders) are generally not liable for company debt.
  • Nominal tax rate of 27.5% for small business entities (aggregated turnover less than $10 million).

Cons:

  • More complex structure to setup and operate- requires compliance with the Corporations Act 2001 and imposes reporting obligations.
  • Greater administrative costs.
  • Must be registered for GST if the annual GST turnover is $75,000 or more.

 

Trusts and Joint Ventures

A trust is an obligation imposed on an individual (a trustee) to hold property or assets for the benefit of others (beneficiaries). Trusts are less common for startups.

Pros:

  • Relatively easy to set up and operate.
  • Potential tax benefits.

Cons:

  • More complex structure to setup and operate – requires a formal trust deed that sets out how the trust operates.
  • Requires a separate Tax File Number.
  • Must be registered for GST if the annual GST turnover is $75,000 or more.

 

 Key Takeaways and Next Steps

Starting a business is an exciting yet stressful time. Protect your business interests and ensure that you are structured for success by contacting Rankin & Co. on 0477 004 437.

 

For more information

On business structures: https://www.business.gov.au/info/plan-and-start/start-your-business/business-structure

On government grants for business: https://www.business.gov.au/assistance

 

2017-12-06T00:28:44+00:00December 5th, 2017|Business Advice, Business Partnerships|132 Comments