So you are thinking of starting your own business or side hustle but not sure where to start? The first thing you should consider is what business structure to use.
There are many structures that you could choose from, which all have different advantages and disadvantages. The structure you choose depends on your budget, risk, number of investors/shareholders and future plans, along with financial considerations.
In this article, we run through 3 common Australian business structures: Sole tradership, Company and Partnership. Please ensure to seek financial advice from an accountant or financial advisor for the financial implications of each structure.
Sole Trader Business Structure
Starting a business as a sole trader is easiest structure to choose because you can start trading almost right away. Once you register your Australian Business Name (ABN), you can start trading right away. If you are trading under a name other than your own personal name, you also need to register a Business Name. It is cheap and quick to set up.
From a legal perspective, this is one of the highest risk business structures because you will be personally liable for anything that happens in the business. For example, if you’re selling clothing and the clothing fabric causes people to get severe allergic reactions – you will be liable for this, not your business. You do not have a separate business entity to protect yourself under. This means that your personal finances, family home and vehicle could be at risk if you are liable.
The other disadvantage of a sole tradership structure is that you can’t bring on more investors or partners in this structure. If you want to bring investors and partners, you would have to change to a different structure to do so.
This is not to say there is never a time and place for sole tradership to be worthwhile. If you are a low risk business, have spoken to an accountant or tax advisor about tax implications for you, and have checked that your insurance cover is sufficient to cover you for key risks, then a sole trader structure may be appropriate.
Partnership Business Structure
A partnership structure is relevant if you have more than one person involved in starting your business. It is similar to a sole trader structure, in that you and your partner(s) will be personally liable. This means your personal finances, family home and vehicle may be accessible if you are liable in your business. However, this liability might be limited depending on your Partnership Deed.
A partnership is created by a Partnership Deed, which outlines your obligations and liabilities as partners. In some partnership structures, like a general partnership, all partners are equally liable and the liability is unlimited. Depending on what is written in your Partnership Deed, if one partner is unable to pay then you and the remaining partners might be liable for that partner’s share. It is very important to have a lawyer draft a Partnership Deed for you to ensure it reflects the level of liability you expect.
Company Business Structure
A company structure is a more costly arrangement, and require more extensive record-keeping and compliance requirements. There is a the tax rate for a company is a flat 30% tax rate. Additionally, you would likely be a director in this type of structure, and therefore director duties apply to you.
However, the benefit of a company structure is that your personal assets are protected from the business debts and liabilities. A company has the benefit of what is called the ‘corporate veil’, a concept where the business liability is essentially quarantined to the company assets, except in exceptional circumstances such as fraud of a director.
This is a recommended structure if:
- your business has a high risk of liability;
- if you have a lot of personal assets; or
- if insurances may not be sufficient to cover you for your concerns.
It is also a beneficial structure if you are thinking of bringing on more investors and raising capital, as it is a very flexible structure to allow for this.
While it is fairly easy to set up a company through ASIC, keep in mind ASIC does not prepare all the legal documentation that you are required to maintain as a company. These documents include establishment minutes, director and secretary consents, members register and other essential documents required under the Corporations Act 2001 (Commonwealth).
Key take-aways
When you are thinking of starting a business, it is essential to think about which structure to start with, especially from a liability perspective.
Though you can change the structure later, doing so can come with additional costs, for example, documentation to transfer intellectual property, supplier contracts, etc. Additionally, once you start selling products through a particular structure, that structure will be the one liable for any issues that come up with that product.
We can help you work out the best business structure for you and set up your structure with all of the legal documentation required. Contact us for a free consultation.
