Types Of Business Structures & Choosing The Right One
Starting a business on your own is a brave thing to do. Being your own boss, working the hours you want, it all sounds so fantastic, and sometimes it does turn out this way. But what kind of business are you? That may sound like a strange question, but it can be one of the most important questions you ask yourself when setting up your business and looking to the future.
We’re going to walk you through 4 different kinds of business structures in this article to help you understand what they are and if they suit you and your business.
If you want to know more about these structures, or found one which suits you and you want to sink your teeth into learning more, let us guide you on how to best set up your operations today.
This is possibly the most common form of business structure for startups, especially. A really common question we receive at The Entourage is the question of if a business should be a sole trader or a company. A lot of professionals, such as copywriters, graphic designers, and other contractors usually structure themselves as a sole trader.
It's a simple structure with you as the only person in the business making all the decisions for the business. However, you'll then be the only person who's also legally responsible and liable for all the decisions made by the business.
Advantages of being a sole trader:
- Simple to set up and maintain
- Any profits made are yours
- Any decisions to make are yours
- You can choose to change the structure at any time you want
- You have creative control over how you market your business
Disadvantages of being a sole trader:
- You're personally responsible for any debts the business incurs meaning your personal assets are at risk if things go bad
- It may be difficult to take time off
- You may be ‘in’ the business 24/7
- If you begin to make good money, you'll be taxed at a very high margin
- You have to pay yourself a salary, your own superannuation
- Can be difficult to obtain finance from the banks
Another type of business structure is partnerships, which is when 2 or more individuals choose to work together under one professional umbrella. You become co-owners of a business and can combine your experience, knowledge and assets to the benefit of the business.
You can hire employees if you wish with all profits split evenly between the partners of the business or re-invested back into the business.
There are different kinds of partnerships you can get into and we highly recommend employing a lawyer to iron out any worries before going into business together.
Types of partnerships
General partnership: As the name suggests, this is the most common type of partnership. All partners are liable for any debts incurred and are all liable for any activity the business generates.
Limited partnership: This is where 2 or more people go into business together, but they are only liable up to the amount they invested into the business. This is also reflected in the amount by which profits are shared. Invest more, get more, but risk more.
Incorporated limited partnership: This is a special kind of limited partnership for those engaging in high-risk investments. It is legally a separate entity from the partners, reducing personal liability. It must have at least one general partner or two or more limited partners.
The advantages of a partnership are:
- They are quite simple to set up and maintain
- More owners bring more capital and more ideas for the business
- Easy to change the business structure if needed
The disadvantages of a partnership are:
- You need to set out rights and privileges and set up a legal document to make sure everything is noted and recorded which can be expensive, but it can save you from potential problems in the future
- You must share control over the business
- All partners share liability
- All partners share profits too, so you all may end up paying higher tax rates
- Disagreements between partners could disrupt the business
A company is when you register your business with ASIC - the Australian Securities and Investments Commission. It costs some money, but then the business becomes a separate entity from the business owner. This means the company can own assets and the company can be liable for debts, meaning only the assets of the company can be used to pay off these debts.
The company tax rate is different and often lower than a personal tax rate. Any money made by the company is hence taxed differently to the businesses mentioned above. Additionally, if your turnover is greater than $75,000 a year, you will be required to pay Goods and Services Tax (GST). Optionally, you can register for GST if you earn less than that, with all the joyful Business Activity Statements (BAS) that go along with it.
The advantages of operating as a company:
- You reduce the personal responsibility for any debt liability the company accrues
- It's easier to raise finance if you are a company
- Company tax rates are lower, so for big earning companies, this is an advantage
The disadvantages of working as a company:
- Operations are held by directors who answer to shareholders
- There are higher setup costs
- You must understand and comply with all statutes of the Corporations Act 2001
- A lot more paperwork and compliance is required as a company
The fourth kind of business structure you can use is a trust. This is an entity that legally holds assets and income for the benefit of others. You can have an individual trustee managing it, or a board of directors.
The trustee must own and operate the business assets, and then they distribute the income to the beneficiaries listed.
The beneficiaries then pay their nominal tax rate as individuals on that amount of money.The advantages of using a trust include:
- Greatly reduced individual responsibility for any debts incurred
- If all profits are distributed, trusts don't pay tax
- There is flexibility in how the profits are distributed by the Trustee meaning, if you can distribute more income to those with lower individual tax rates, you can save money on overall tax
The disadvantages of running a trust:
- They're very complex to set up and keep running, often beyond the scope of normal business owners
- Can be expensive to set up and maintain with legal costs involved
- They have a limited lifespan, usually around 70 or 80 years
- Very difficult to dissolve if the need arises
What business structure should you use?
So, with all of this knowledge about the different types of business structures you could utilise, what would you consider when it comes to your business structure? Should you choose a structure that's easy to set up and pivot if the need arises? Do you go into a partnership with your friend because you’ve both got money to invest and great ideas? If you have the funds, is it worth looking into a company or trust?
How much control do you want over your business's future? How much do you know about the ins and outs of the business and would it be better leaving those decisions in the hands of others?
Take a loot at the chart below, thanks to the website Reckon, which could help you make your mind up about which structure could suit you best.
Being in business for yourself and your passion is a powerful thing. Most business owners went into business to be in control, work for themselves and not for someone else. You're in charge of the marketing and selling, and you're the name behind the brand. It's very exciting.
However, being able to structure your business in a way that will benefit how the longevity and sustainability of your business is a different story. Which structure suits you as a person and your business long term can be a huge decision to make.
That's why we at The Entourage are here to help you make that decision, and to help you grow and build your business as big as you can. Try one of our business courses now, and get to grips on being in business for yourself.
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