One of the big decisions you’ll have to make when starting a business is what structure best suits your idea. Often entrepreneurs choose their structure based on cost and simplicity, however this is not always the best way for your business needs.
The business structure you choose will determine many things about your business going forward including the amount of tax you pay, whether you’re considered an employee or the owner of the business, your potential personal liability and risk, your level of control over the business, your ongoing costs and the volume of paperwork needed.
In our experience with entrepreneurs, there are usually 4 different business structures people are considering:
- Sole Trader This is the simplest business structure, with the business operated in the business owner’s personal name. Sole Traders can get started with a minimum of paperwork, hire staff and taking advantage of their tax-free threshold. However, their personal assets are at risk if the business gets into difficulty, and this structure can limit their ability to raise capital/funds.
- Partnership – A partnership is when two or more people go into business together. Partnerships are generally easy to set up and partners share control and management of the business. Partnerships can either be general, where all partners have unlimited responsibility for the debts of the business, or limited, which allows for passive partners to limit their liability to the amount they agree to contribute to the business.
- Company – Unlike a sole trader or a partnership structure, a company business structure is a separate legal entity, meaning the risk of the business is kept separate from your personal assets. Companies also allow you to raise funds by issuing shares, but are generally more complicated and expensive to set-up.
- Trust – Trusts are a customisable structure, generally with a trustee company operating the business for the trust’s beneficiaries. Trusts are popular for tax reasons, as well as there being a variety of trust models which can be customised to meet the needs of the business. This customisability means they can be expensive to set up and maintain.
If you would like more help determining your business structure:
- Book in a 30-minute, no-cost office hours session with our accountant, Stuart from Pursuit Advisers or lawyer, Rob from Pathfinder Law.
- Check out business.gov.au for more detailed explanations of each type of structure
- Compare the pros and cons of different structures using Business Victoria’s summary table