What Is A Business Structure?
Think of your business structure as the foundational frame of a house. Once you’ve put it in place and started building the rest of the house, it’s difficult to turn back and restructure! Setting up your business correctly from the beginning is much easier and less stressful. If in the future your business starts growing, it could get very complicated to change your structure — which could cost you valuable business opportunities in the long run if you suddenly find you’re needing to scale up.
What Are The Four Common Business Structures?
You’ve got three main structures to choose from, all of which you’ve likely heard of somewhere before:
- Sole Trader
There’s also a fourth structure that is sometimes used called a ‘trust’. This one is a little more complicated and is generally used for tax reasons. If you’re interested in learning more about this, we’d recommend speaking to an accountant or tax advisor.
We’ve summarised some of the key differences between sole traders, partnerships and companies in the table below.
|A sole trader is where an individual operates a business under their own name and an ABN.|
This is NOT a legal entity separate from the owner.
|A partnership is where multiple people run a business together as partners.|
This is NOT a legal entity separate from the partners themselves, but will have its own ABN and TFN.
|A company is where one or more people set up a separate legal entity called a ‘company’ as shareholders.|
The entity will have an Australian Company Number (ACN) and will also usually have its own ABN and TFN for income tax purposes.
▪ Easy to set up
▪ Minimal admin
|▪ Easy to set up|
▪ Easy to dissolve
|▪ Limited liability|
▪ Easier to raise capital
|▪ Personal liability|
▪ Hard to raise capital
▪ No business partners
|▪ Personal liability|
▪ Hard to raise capital
▪ Responsible for shortfalls of other partners
|▪ More expensive|
▪ More admin
Things To Consider
Your choice of business structure will be influenced by your individual circumstances. Many people choose to start as a sole trader because it’s simple and cheap, which can be a great way to begin if you’re starting out without a lot of resources or capital behind you.
As the business grows, people who have started out as a sole trader can consider setting up a company. A proprietary limited (PTY LTD) company — also known as a private company — is the most common option for small businesses and startups.
- Liability – Are you prepared to risk personal liability for any debts incurred by your business?
- Capital – How do you plan to raise capital for your new business? Would you consider equity financing (people buying shares in your company)?
- Co-Founders – Do you have co-founders? If so, how do you want to share ownership of the business?
- Tax – Do you know your tax obligations under each structure? If not, you should talk to your accountant.
You’ll also need to think carefully about your business name – you want to make sure it’s not already being used!
When it comes to the legal side of things, there are 2 steps to take regarding your business name.
- Register your business name on ASIC. You can do this yourself on the ASIC website but if you need guidance you can speak to a lawyer. Remember – just because you’ve registered a business name, it doesn’t stop competitors from trading under a similar name or logo. To properly protect yourself you need to…
- …Register a trade mark. Registering a trade mark can protect your business from imposters and misleading marketing from competitors. Feel free to get in touch with one of our consultants at Sprintlaw if you’d like more information on trade mark registration.
How Do I Get Started?
You can apply for an ABN and set up as a sole trader for free! Just check out the Australian Business Register website.
You can apply for an ABN for your partnership for free too. However, you’ll need legal advice to draft up a partnership agreement. Have a chat to us at Sprintlaw if you’d like more info!
It is possible to DIY company registration, but this can be a daunting process if you’ve never done it before. At Sprintlaw, we have a team of experienced lawyers who can help you through the process and assist with any other legal issues that may arise on the way.
It can be hard to decide on the best structure for your business – and it’s something you want to get right! If you want to talk through your options, feel free to get in contact with one of our consultants for a free, no-obligation chat.
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