Overview
If you are thinking of developing a new business or perhaps re-structuring an existing business, it is important to make sure that you are choosing the business structure that will best suit your needs not just now but also in the future. We regularly work with clients to ensure that their businesses have a solid legal foundation. We are also able to provide advice on how to protect your personal assets from business creditors and the tax implications of different business structures.
Types of business structures
It is important to understand the types of business structures available before starting any new business. Four of the most common business structures used in Australia are discussed below.
Sole trader
You operate the business as an individual and are the sole personal legally responsible for all parts of the business. Being a sole trader can be a cost effective structure for a single person businesses. However, there are two key issues to consider before setting up business as a sole trader.
Firstly, all income will be treated as personal income and taxed at appropriate personal income tax rates. Secondly even if you employ people to work for you, your personal liability will not be limited in any way. You will be solely responsible for all debts and liabilities of the business.
Partnerships
Two or more individuals set up and run a business together but not as a company. A partnership agreement governs how the partnership operates as between partners particularly in terms of profit sharing.
Partnerships are relatively simple business structures to set up and often popular for family businesses. One potential downside of a partnership is that ordinarily each partner will have unlimited liability for any debts or liabilities incurred by the partnership.
Company
A company structure enables a business to be set up as a separate legal entity to any shareholders of the company and can provide protection from liability. It is an appropriate structure for many businesses especially if growth is on the horizon.
Any income is earned by the company and not the shareholders. This potentially may result in a more beneficial tax rate than if earnings were derived directly by the shareholders. A company structure does bring with it certain responsibilities though, including additional compliance obligations under the Corporations Act.
Trusts
A Trust is a business structure that holds property or income for the benefit of others. Trusts are relatively straightforward to set up and can be used to minimise individual risk and enable business income to be distributed to a number of individuals or entities.
The use of trusts, including family trusts, as a means of distributing income, have been subject to ATO scrutiny in recent years and it is important that any trust structure is properly established and appropriately managed on an ongoing basis.
Other options for business structures include joint ventures and franchise agreements. We are able to advise you in relation to these and other business models and can work with you to determine the most appropriate business structure for your needs.
Next steps
Once a decision has been made regarding an appropriate business structure we are able to assist you in respect of all aspects of setting up your business. Areas where we can advise and assist include:
- developing a business plan including goals and a plan to work towards achieving those goals;
- what finance needs to be put in place, including considering available options such as business loans, lines of credit and business overdrafts;
- a plan for distributing profits, decision making and resolving disputes (if a structure other than a sole trader is adopted); and
- long-term development and succession and exit plans.
Changing business structures
We are also experienced in advising clients in relation to the restructuring of businesses including the dissolution of partnership agreements and joint venture arrangements.
As each business is unique we recommend that you contact us to discuss your matter. Once we have an idea of your situation one of our experienced business lawyers will be able to work with you to achieve the best possible outcome for your particular circumstances.
