Setting Up Your Business: What Structure is Best for You?
Selecting the right business structure is critical as it plays a role in the success of your business. There are several factors to consider when doing so, and they are highly dependent on your priorities, circumstances and resources.
To help you decide, take some time to consider these crucial questions:
Will you have other partners and/or investors in your business?
How much liability exposure would you want to take on?
How much control over the company would you want?
How much money and time are you prepared to invest in the administrative costs of setting up and maintaining the business structure?
What is the most tax effective strategy?
Which one would be the easiest to dissolve?
Below are your options and their respective pros and cons.
SOLE TRADER
Mainly suitable for small-scale businesses. This is the simplest and least expensive structure to set up as it involves only one person. This person is responsible and has full control for all business operations and is able to receive full profits made from the business.
Perhaps the biggest drawbacks from this type of structure is that it doesn’t provide much protection in terms of personal assets. If things go wrong, the personal assets of the owner will be at risk from claims arising from the business. Also, it is not a great structure to use if you want to grow the business and have people investing into it.
PARTNERSHIP
Partnership allows you to set up a business with two or more people or entities and is still a less expensive option than setting up a Company. In contrast to a Sole Trader, you will be able to have more resources, skills and assets as contributed by the different partners. Control, responsibility and obligations within the company can be divided among the partners.
While shared control and responsibility can be an advantage, it can also be the biggest drawback in this type of structure. All partners will be responsible for the business decisions. And if things go wrong, the personal assets of all the partners will also be at risk from claims arising from the business.
You will also need to think about entering into a partnership agreement and buy/sell deed.
COMPANY
The most important characteristic of this structure is that the business is viewed legally as a separate entity from its owners. It will have limited liability which means that the company assets will be the only ones at risk in case of claims arising from the business. It protects its owners’ personal assets as opposed to Sole Trader and Partnership.
The drawback from this type of structure is its cost and complexity to set up. There will be loss of control over the business by the owners and there will be more financial and legal reporting obligations involved.
You will also need to think about entering into a shareholder agreement and buy/sell deed.
TRUST
This is a type of business structure that holds property or income for the benefit of others. It is not a separate legal entity. The person or company becomes a trustee for the assets of others and will carry out and do business on behalf of the beneficiary. Like Companies, personal liability is limited and personal assets protection is provided.
A drawback from this type of structure is its cost and complexity to administer and establish. A trustee’s control over the business is also limited by the Trust Deed that will be established which will also be an initial outlay for you.
The table below highlights the differences outlined above.
CIRCLING BACK
Question: Which structure should you go for?
Answer: It depends.
It is best to seek advice from your lawyer and/or accountant so they can objectively assess the situation of your business before making any decisions regarding business structures. Hewlett Legal can assist you. Contact us on 3310 8716 or email to discuss your specific business requirements.
