Posted by Regie Anne Gardoce on 29 April 2019
So you’re running your own business – great!
Your first step is usually deciding on a business structure. Choosing your business structure is really important, and will depend on which structure suits your business’ needs the most.
The structure you use will affect everything you do as a business, from hiring employees to being able to scale up as your business grows.
So, it’s important to do your homework and get it right from the start.
This article will talk about two of the most common business structures – a partnership and a company. But what exactly is the difference between the two?
We know it can be a headache to think about this stuff, so we’ve got your back!
A Partnership Structure
A partnership structure is where multiple people run a business together as partners.
How Does A Partnership Structure Work?
Put simply, a partnership does not separate the business from its partners.
This means that if something were to go wrong in the course of business, you could be held responsible for your partner’s mistakes.
The pros? Partnerships are quite easy to set up and also easy to dissolve, with little administration costs. Unlike a sole trader, you can share the workload and management of your business with your fellow partners.
However, since the business is not a separate legal identity, this means that partners can be personally liable for other partners’ mistakes (which is the last thing you want!).
This structure also makes it a little difficult to raise capital, which could be a red flag for tech startups who want to appeal to investors in the future.
If you’re thinking about a partnership structure for your business, you should:
- register your business name,
- register an Australian Business Name (ABN) and Tax File Number (TFN) for tax purposes, and
- sign a Partnership Agreement between you and your partner(s).
Note: partnerships are regulated according to what state or territory they operate in. More information can be found here.
A Company Structure
A company is where one or more people set up an entirely separate legal identity as shareholders.
How Does A Company Structure Work?
A company exists as a legal identity separate from any business owners or founders.
Rather than partners, companies have “shareholders” and “directors”.
Shareholders are the legal owners and controllers of the company, who appoint “directors” to make all the decisions (yes, you can be both!).
Getting to know the difference between shareholders and directors can be tricky. Australia’s corporate regulator, ASIC, has more information on this here.
There are different types of companies, but the most common ones are called “Proprietary Limited” companies. These are also called private companies.
Registering your business as a company offers the most protection from potential risks.
This is because the company is a separate legal identity from its shareholders, which means they have “limited liability”. Their liability is limited by the value of their shares, and shareholders generally cannot be sued for any company mistakes.
Being a separate legal entity also means that the company can keep the business’ most important assets safe, such as $$ and intellectual property.
And, if you are thinking about raising capital, this structure makes it pretty easy to do so.
The cons? It’s not cheap!
There are a lot more admin and costs involved with this option, so be prepared to put some of your cash in maintaining your company structure.
For starters, ASIC takes an upfront $488 fee for company registration.
If you think a company structure is right for your business, you should:
- register an ABN and an Australian Company Number (ACN) with a TFN for tax purposes, and
- sign a Shareholders Agreement between you and your shareholders.
Think a company structure suits your business but want some more advice? We can help! Find us here.
A Partnership Structure Vs. A Company Structure
So, we’ve run you through some of the basics. But how do you know what’s right for your business?
When deciding which business structure best suits your business, it really depends on your individual circumstances.
What’s important to your business? How much liability do you want to protect yourself from? How much cash do you have in your pocket?
Some people might choose a sole trader structure because it is simple, low-maintenance and cheap. This is great if you’re starting out alone, without a lot of resources or capital behind you.
But as your business grows, many sole traders (and partnerships) consider setting up a company.
For startups, for example, things may get tricky when co-founders leave, or when they try to raise capital.
A company structure offers a lot more protection against risk and disputes than a partnership, so we encourage choosing this option from the very beginning!
Remember – your business structure affects everything – including your tax obligations. So it’s a good idea to talk to an accountant for some tax advice too.
If you’ve decided on your business structure, that’s great news!
Our team at Sprintlaw is happy to help you get your legal documents in good shape. Get in touch with us here.
Still unsure? We’re here to help!
The Australian Government provides lots of information on partnerships and company structures, or you can read our legal guide on business structures.
Otherwise, we’re happy to answer any questions you might have or help guide you in choosing an appropriate business structure.