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To run a business, it’s important to get comfortable with making decisions. The choices you make as a business owner will naturally impact your business’s future. It’s wise to gain as much clarity and knowledge before taking any leaps.
One of the most crucial decisions you’ll be faced with as a business owner is going to take place before you even begin running your business. That is, determining the legal structure of your business.
A business’s legal structure impacts matters such as taxation, legal obligations, liabilities and risks. So, what business structure should you pick for your business?
The answer to this question depends on your individual business’s needs, goals and circumstances. It’s best to properly understand the different business structures before you make a choice.
Keep reading to learn more about business legal structures, plus what the most common one in Australia is.
What Is A Legal Business Structure?
A legal business structure essentially determines how your business is set up, at its very core.
The legal business structure you choose for your business will decide everything, from your legal compliance duties to even your day-to-day business operations. It basically creates the legal identity for your business. This legal identity then determines the limitations and rights for your business as it functions in the world.
In Australia, there’s a number of different legal business structures. Each one has their own advantages and disadvantages. As the owner of a business, you’ll need to think about things such as your commitment to ongoing obligations, the risks associated with your business, the kind of liabilities you’re comfortable with as well as the set up costs in order to figure out the right legal structure for your business.
What Are The Main Types Of Business Structures?
The most frequently registered business structures in Australia are: sole traders, partnerships and companies. Before you choose a business legal structure, it’s important to adequately understand how each one differs from the other. Let’s take a closer look at each legal structure below.
Sole Trader
As the name suggests, a sole trader is an individual who is responsible for their entire business. Sole traders retain full control over their business however, their business is also attached to them personally – there’s no legal separation between a sole trader and their business. As a result, whatever happens with the business (good or bad) personally impacts the business owner.
On the other hand, the registration process to become a sole trader business is extremely cost effective and simple. To register as a sole trader, you simply need to apply for an ABN on the Australian Business Register website. The application is free and not particularly time consuming. Once you’re done, you can opt to register a business name (only if you’re using something other than your personal name) and then you’re ready to start trading as a sole trader. Moreover, there’s not a lot of legal obligations for sole traders, so for the most part you’ll be left alone to run your business.
Partnership
For partnerships, the set up process is similar to that of a sole trader. To start business with partners, each partner will need to attain their own ABN’s. From there, you can register a business name if needed. At this stage, it’s also a wise idea to determine the rules of the partnership in a well drafted legal document, such as a Partnership Agreement. This can help keep all the partners, businesses and any other stakeholder protected.
As you may have noticed, partnerships are daily easy to set up. There aren’t a lot of ongoing obligations either, so you won’t have to worry about things like annual fees or audits.
However, the risks associated with a partnership are also very similar to that of a sole trader. When you set up as partners, there’s no legal separation between you and your business. Therefore, your liabilities won’t be protected. If something doesn’t go your way, it’s not just your business that will be impacted – you can be personally at risk too.
Company
A company is entirely different from a sole trader or partnership business structure. Companies are legal entities on their own. This means, a company has its own legal identity, allowing it to do things like earn a profit, work up debt, own or sell property. This protects your personal liabilities as there’s now legal separation between you and your company. Setting up a company is more expensive and you’ll need to learn about your ongoing obligations with ASIC. However, for all serious business endeavors, a company structure is recommended.
Often, potential business owners see setting up a company as a hassle and avoid it. However, the process doesn’t need to be all that daunting. We’ll admit, setting up a company does involve a little more work – you need to decide on factors like shareholders, directors and company governance. However, with the help of a legal expert the process will be a lot easier.
What Legal Business Structure Is Most Commonly Registered?
So, out of all the business structures, which one is the most commonly registered in Australia?
A company is the most commonly registered business structure. According to ASIC, thousands of companies get registered all across Australia, every day.
Granted the amount of benefits having a company brings to business owners, it’s no surprise that companies are the most common type of legal business structure business owners are choosing to go for.
Remember, the word ‘company’ is a pretty general term. In reality, there’s a number of different types of companies out there. Even though companies are the most popular legal business structure, they won’t all be identical to one another. If you’re thinking of registering a company, it’s always a good idea to chat with a legal expert about your options. They’ll be able to provide you with professional guidance on the type of company that will best suit your business goals.
My Business Is Just Me, Can I Still Register As A Company?
Yes, you can always register a company with just one person! There’s no need to have a whole team ready before you set up a company. Under certain business structures, you can be both the shareholder and director of your company, meaning there’s no need to have multiple people involved in your business (if you don’t want that).
If you would like more information on setting up your company with just one person, our legal experts are happy to help.
Next Steps
A company is the most common legal business structure in Australia. It’s important to understand all your options when it comes to legal business structures and choose the right one for your venture. To summarise what we’ve discussed:
- Choosing the right legal structure is crucial for a business and impacts taxation, liabilities, and legal obligations
- The main types of business structures in Australia are sole traders, partnerships, and companies
- Sole traders have simple registration processes but lack legal separation between the owner and the business
- Partnerships have similar setup processes to sole traders and involve shared liabilities among partners
- Companies offer legal separation between owners and the business, protecting personal liabilities, but involve more complex setup and ongoing obligations
- Companies are the most commonly registered business structure in Australia, offering benefits that attract many business owners
- Even as a sole individual, you can register a company, serving as both the shareholder and director
If you would like a consultation on legal business structures, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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