One of the biggest decisions you will make at the onset of your startup is choosing the business structure. The hardest part of this step is projecting into the future and guessing how things might grow or change. It’s trying to foresee if you and your business partner might one day have a falling out or if as a sole trader you could lose your hat if things go sour or if you will one day be holding a capital raising and handing out shres. Before you commit, do as much research on the pros and cons as you can and try to realisticly guess how your business structure would handle the worst and best case scenarios for your business. Here’s an introduction to your business structure options:
Sole Trader
With this type of business organization you and your business are one and the same. Although it centers around one person, that person can employ people, engage other contractors and apply for financing. But the simplicity of having one person running the show is also the sole trader’s Achilles heel.
Some of the advantages include:
- It is simple, cheap and requires little paperwork to register this type of business
- It is an easy business model to expand later if need be
Some of the disadvantages include:
- If you are a person who is frightened by liability, this may not be the right choice for you since you and the business are one. Anything you sign to, you sign both yourself and the business to.
- If you die or are incapacitated, the business essentially ceases to exist
If you choose this model and want to run under your own name, all you need to do is register for an ABN and you’re up and running, otherwise you will need to file for a business name in your state. You can find out more on how to register your business in each state here.
Partnerships
Although a partnership allows you to share the liability of your business, sometimes bringing in more people can be a liability all its own. By law, the size of a Partnership is not unlimited, and usually is is between 2 and 20 partners with each having some ownership.
Some of the advantages of forming a Partnership include:
- it’s relatively easy to set up, only slightly more so than a sole proprieter
- There is less paperwork and it is less expense than become a full company or a trust
- There is less government interference and regulation in comparison to registering as a company
- There is less need for hiring lawyers, accountants, and other consultants
- There may be tax planning advantages (such as income splitting)
And some of the disadvantages include:
- Divided authority can mean that squabbling between partners can have strong repercussions for the business.
- If a partner leaves , dies etc. it can be challenging. It means there will often be expensive legal costs, paperwork and time spent. That person’s shares will likely have to be valued which can be complicated.
- It is equally difficult if another partner is to be added.
- All partners are jointly liable, so that means you can become victim of another person’s bad business decision or be left with debt or legal liability.
There are two types of partnership, limited and general and a limited partnership will allow for much more protection. A limited partnership can have a few ruling general partners and then a large number of limited partners and are not permitted in Western Australia or Tasmania. A limited partner cannot take part in the management of the business, and generally has no authority to act on its behalf, although this can be modified to an extent with a Partnership Agreement. In many ways, a limited partner is more like a passive investor in the business. They take a risk in providing the business with capital (eg. to help launch or grow the business), but if things go wrong they do not have the liability associated with general partners.
You can find out more about partnerships in Australia here.
Company
Registering a company is the real deal which gives you the full menu of abilities from operating throughout Australia to having shareholders. If you see your business scaling in a big way, this is the choice you should making in spite of the higher up-front cost. Registering a company is done through ASIC and costs relatively $600. There are many incorporation companies out there that can hold your hand through the process that may cost a bit extra but may save you from some mistakes in the long run.
Some of the advantages include:
• Perceived seriousness of having “Pty. Ltd.” behind your business name
• Companies are taxed at a flat rate while individuals are at a marginal rate. This may or may not result in paying less tax, but companies also have tax deducations available to them.
• It’s easier for companies to attract investment
• The fact that a company has shares makes it easier to tranfer and sell
• Unlike a sole-proprietor where the business dies with the owner, a company is perpetual
• The company is its own entity free from one person and can own property
Some of the disadvantages include:
• Both upfront and ongoing costs are higher. You will likely need a secretary to keep atop of company finances, the cost of registering is higher and the annual cost of review from ASIC is higher.
• Can be difficult if you are a large company registering or are growing, but at least the advantage is that the freedom to grow is there.
• There are a number of rules and regulations to comply to that will need more attention and legal assistance. Companies must report their activities, maintain proper records and comply with laws.
Although our info is researched, we aren’t lawyers so check yourself before you wreck yourself and get some professional law consultation if you have any questions.
Hi Rachel,
Good article, and thanks for the link to my partnerships article at http://www.wecancreate.com/blog
There are additional articles on there that deal with sole trading and trusts, in case your visitors are interested in that too.
Keep up the good work.
We would always encourage people to set up as a Pty Ltd whenever possible. The exception is for people setting up a hobby business or the like. A Pty Ltd does not cost that much more to run per yearm (ASIC fees of $212 and accountancy costs) and the benefits are clear-cut. In addition to the points already raised:
1. The liability issue. This is a huge reason to set up a Pty Ltd. Although note that Directors of Pty Ltd companies may not have personal liability however they do have the responsibilities associated with being a Director.
2. Some firms won’t deal with sole traders. So it is not just a perception issue.
Finally, the comment “Companies must report their activities, maintain proper records and comply with laws” may imply that sole traders may not have to do this. For the record, sole traders and partnerships have must also report, record keep and legally comply.