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Choosing A Business Structure - Which One Is Right For You?

When starting out in business or changing the nature of your business you need to consider which method of operating the business is best for you.

The three main types of business structures are sole trader, partnership and proprietary limited company. Each has its own advantages and disadvantages and what is best for your business will depend on things such as:

- the type and size of business; - finance requirements; - establishment costs; - taxation; and - requirements such as asset protection and limited liability. Sole trader

A sole trader is a person who owns and manages a business on his or her own, either using their own name or a business name. If any name is used other than the person?s own name, it must be registered with the appropriate state/territory authority. This does not make the business a separate legal entity.

Operating as a sole trader is the simplest and least expensive business structure to set up. It allows the owner total control of the business management, assets and profits. The income of the business is treated as the owner?s individual income and will be taxed at the marginal personal income tax rate.

The owner will also be responsible for all the actions of the business and personally liable for the debts of the business. This can make the assets of the business and the owner vulnerable to loss if the business incurs heavy debt or in not successful.

Partnership

A partnership is an agreement between persons or entities to carry on a business in a common view to make profit. A partnership can have up to twenty partners and may trade under a business name or under the names of the partners.

Operating through a partnership allows for a greater pool of resources, from capital to expertise and the partners can decide on how to control the business.

Partnerships will be governed by the relevant partnerships legislation in each state and territory. In NSW this is the Partnerships Act 1892 and in Queensland it is the Partnerships Act 1891.

Depending on the nature of the partnership such as size and complexity, partners may wish to consider entering into a partnership agreement that sets out the agreement between the partners and their rights and obligations to each other. This will reduce the likelihood of disputes and can clearly set out procedures to be followed for situations such as where a partner wishes to leave or a new partner is appointed.

A partnership does not pay income tax. Instead, each partner includes his or her share of the profits or loss in their individual tax return. This may allow for some business arrangements (such family operated businesses) to spread income over two or more members of the family, minimising taxation liabilities.

Proprietary company

A private or proprietary company is a more complex and expensive business structure to establish. The company must be registered with the Australian Securities and Investments Commission (ASIC), report regularly to ASIC and pay yearly registration fees.

A company must have at least one shareholder, director and company secretary, which may all be the one person. A company must comply with regulations set out in the Corporations Act 2001 (Cth) and the company?s constitution. Shareholders may also choose to enter into a shareholders agreement that sets out the rights and obligations of each shareholder.

A company is a legal entity separate from its shareholders. This means that if the company fails or cannot meet its debts, the company is liable, not the individual shareholders, who will only lose their investment.

For taxation purposes, a company pays tax on its profits, currently set at a rate of 30%. Individual shareholders pay tax on any income they receive from the company such as dividends.

There are many responsibilities that come with being a director or officer of a company. The Corporations Act sets out a number of directors? duties such as:

- duty to act with care and diligence; - duty to act in good faith and the best interests of the company; and - duty not to improperly use information or position for personal benefit.

Directors and officers of the company must ensure that the company is able to meet its debts when they become due. Directors are responsible for the company complying with reporting requirements to ASIC and maintaining appropriate records and registers in accordance with the Corporations Act. Penalties for these breaching these obligations range from the imposition of fines, disqualification from managing corporations and imprisonment. In some circumstances, directors and officers may be personally liable.

Before choosing a business structure you should obtain legal and accounting advice to determine what suits your needs. A properly established business will save you time and money later down the track if you decide to sell and, depending in your needs, can be effectively utilised to minimise taxation liabilities and increase profits.

Frank Egan is the Chief Executive Officer of LAC Lawyers Sydney http://www.laclawyers.com.au and has over 27 years of experience as a lawyer.

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