As a business owner, your business structure is one of the most important decisions you’ll ever make. Aside from causing operational pain, the wrong business structure could literally cost hundreds of thousands of dollars over the life of your business.
If you’re feeling overwhelmed, fear no more. As always, our aim is to eliminate confusion, by sharing the best-kept secrets to choosing the right business structure for your enterprise.
While each business is unique and requires a tailored approach, we’ve decoded four different ways to structure your business in Australia.
Sole trader
Ready to start your business and want to broadcast your message across the planet? If you’re working on your own, you may feel like becoming a sole trader is the best option. There are many benefits to this type of structure, most attractively you retain 100% of the profits, without the requirement to share proceeds with shareholders.
It is also relatively straightforward to set up a sole trader and you get to retain full control over how your business runs. You may however be limited as to how many customers you can serve and find it difficult to retain staff if competitors offer more benefits.
While less admin is another benefit, full ownership does mean that you have unlimited liability, which can put your personal assets at risk. You may also find it difficult to scale the business as access to capital is limited and retaining long-term staff may be difficult.
Partnership
If you’re looking to go into business with at least one other person, then setting up a partnership may be right for your situation. It’s said that opposites attract, so compared to a sole trader, a partnership has the potential to make the business stronger, if each partner has complementary skills and abilities.
While it is simple to set up, once operating it can be difficult to add or remove partners, so you need to think carefully. Additionally, unlimited liability means you will be equally responsible for any losses that the business incurs. There is also a difference in that the business will have its own Tax File Number (TFN) and Australian Business Number (ABN).
When creating a partnership, communication is vital, to ensure that each partner agrees on how things will be run. While many of the decisions made can be informal, there is an opportunity to create a partnership agreement, ensuring that the business runs smoothly from the outset and to reduce the likelihood of major disagreements.
Company
Whether you are starting a new business, or thinking about changing the existing structure, a company may be the right option. This may be the best choice if you are looking to minimise risk as the company, once formed, will become its own legal entity.
Put simply, there is limited liability for owners, as the company itself is generally responsible for the costs incurred. There are also many tax benefits, allowing you to make a larger profit, as company tax rates can be lower. Ownership is distributed amongst shareholders and if someone wants to leave the company they can choose to sell their shares.
There are however greater costs of regulation and it can be complicated to set up, with a lot more requirements when it comes to administration. If you feel that the positives outweigh the negatives however, then a company structure could be the right choice for your venture.
Trust
Many people are unaware of the hidden benefits of creating a trust. One of the most common uses of a trust is for investments, as there are numerous advantages to doing so. In the long run, a trust can reduce the amount of outgoings, with beneficiaries only paying tax on the income they receive at their own marginal rate.
Holding your business in a trust may be worth exploring as an option, particularly if you are looking to select a legal structure with a low amount of risk. It is important to consider that once established, it may be difficult to switch from a trust to a corporate structure.
Before you make the decision to create a trust, it is recommended that you compare the pros and cons to each option, so that you can be certain you’ve made the right choice.
Want to know which structure will best suit your needs?
While it might feel like you need x-ray vision to see through the complexities of business, the team at MJM Accounting believe there is strength in numbers.
Get in touch with one of our friendly professionals to discuss your business structure. Our armour is knowledge and we are ready to provide a simple and effective approach to all your accounting matters.