I am often asked by clients when they start a business, purchase a business or whilst considering their long term or short-term goals, including succession planning – What is the best business structure?

The most common structures are:

• Company or corporate structure
• Partnership
• Sole trader
• Trust

What are the differences between these business structures?

Company or corporate structure

A company is a separate legal entity and is capable of suing and being sued.

It involves higher set up and running costs.

The benefit is the owners, shareholders or members have limited liability as it is the company that is the trading entity.

You must have at least one director or you can have a board of directors who have obligations to the company and also pursuant to the Corporations Act 2001, the Income Tax Assessment Act 1997 and various other federal and state legislation.

Shareholders actually own the company through their shares.

Income earned by the company belongs to the company until it is distributed to the shareholders.

A company can generally access capital easier.

Partnership

A Partnership comprises two or more people and is set up to distribute income between themselves, but also any losses.

A partnership is generally easy to set up and inexpensive.

The partners must share the control and management of the business.

The business does not pay income on the income earned rather each partner pays tax on the share of the net partnership income they each receive.

There are minimal reporting obligations, but a partnership must have a separate tax file number, an Australian Business Number (ABN) and register for GST if the turnover is over $75,000.00.

Sole Trader

A sole trader is exactly what it means, the one person operates the business.

It is very simple to set up and cost effective.

The person has full control of the business.

The person is ultimately responsible if anything goes wrong and is liable personally for debts, tax etc.

Trust

Trust structures can be complex and expensive to set up and maintain.

Basically, a trustee will hold the business for the benefit of the beneficiaries of the trust.

It will require a trust deed which will outline how the trust will operate.

The trustee is the party that is legally responsible for its operations.

The trustee can be an individual or a company.

The benefit is that the trust can protect the assets of the business.

What should I consider when deciding on a business structure?

The are a significant number of issues you need to consider when choosing a business structure but at a minimum you must consider:

• Control and who has that control
• Costs of set up and ongoing costs
• Legal and regulatory obligations
• Personal liability and what is your appetite for risk
• Taxation and associated revenue issues
• Succession planning
• Your level of involvement such as an employee, director, trustee etc.

A very good outline of what the key differences are can be found on the Australian Government business website.

How can FC Lawyers help?

Our business and corporate team has assisted business clients for over 25 years with all their needs.  Contact us to discuss any aspect of your business structure or any legal issue relating to your business, no matter how small or large.