The legalities of choosing the right business structure for your small business
One of the first decisions you will make when setting up your small business is to choose what structure to use. This will enable you to set a firm foundation and importantly, get clear on your taxation, financial, licencing and legal obligations.
The structure you choose will depend on the size and type of your business, your personal circumstances and also your plans for future growth. Yes, you can always change your structure later on if you need to but if you get it right first time, it will save you valuable time, money and also provide you with greater legal protection.
Whatever structure you choose, ensure that you are able to comply with the various legal requirements it carries. Some of the key issues to consider are as follows:
Ease and cost of establishment – Consider how much money and time you wish to invest in the business during the start-up phase.
Liability of participants – do you want to place your personal assets at risk in the business?
Sale/transfer of assets – how easy is it to sell your share in the business? What is the exit strategy, if the partnership does not work?
Raising capital – do you need plant and equipment?
Limitations of business life – how much time to you have to devote to the business?
For partnerships - How well do you know your partners? What are your partner’s financial statuses?
The 3 most common business structures in Australia are as follows:
Sole Trader is the simplest form of business structure to create. It means that the business is owned and operated by just one person with all profits or losses attributed to the owner.
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Advantages of being a sole trader include |
Disadvantages of a sole trader include: |
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keeping all the profits
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unlimited liability (i.e. the business and private assets of the sole trader are at risk if the business fails because the business and the sole trader are synonymous)
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ownership and control of the business
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degree of personal element can make the business difficult to sell
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lack of formalities and inexpensive to form
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difficulty in raising large amounts of capital |
2) Partnership is a relationship between 2 to 20 persons who carry on business in common with a view to profit. Although not mandatory, it is advised that a partnership agreement is put in writing to ensure that obligations and liabilities of the partners are clear. Remember that you are liable for any decisions and debts of the partnership jointly, so if your partner can not pay the debt you may have to pay from your own personal assets.
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Advantages of a partnership include:
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Disadvantages of a partnership include:
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lack of formalities and inexpensive to form
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unlimited liability of partners, as partnership (like a sole trader) is not a separate legal entity from its members
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the nature of the business can be easily changed by agreement between the partners
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lack of permanence as partners and business synonymous
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potential for partners to pool capital and experience |
difficulty in selling one’s interest
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3) A Company is an incorporated body created by a process called incorporation. Unlike a sole trader and partnership, a company is a separate legal entity to its members.
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Advantages of a company include |
Disadvantages of a company include:
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a separate legal entity from the shareholders or members, as well as those who control its operation
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cost of establishment and ongoing fees
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limited liability for its members (depending on the type of company)
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0nerous reporting and administrative requirements required by law
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perpetual succession – it is ongoing as it does not depend on its participants
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limited management role for shareholders |
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Natural person – which means the company is sued not you personally |
increasingly onerous legal responsibilities placed on directors and company officers |
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a company can now be created with one or more members |
possible loss of control of the company to shareholders
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About the Author
Principal Solicitor at Aquarius Lawyers
