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4 business structures for any new business to consider
Regardless of the industry you’re in, the way you structure your business will have ramifications long into the future.
From the amount of tax you pay to the administrative load and your level of personal liability, the consequences of your decision can be serious; and they may have a profound influence on the success of your enterprise.
It’s vital to fully understand your options and put the necessary consideration into the most suitable one for you and your business.
For most small businesses, there are four basic choices. Familiarise yourself with each of the four structures and then ask yourself the right questions in order to determine which structure is best for your business.
The four basic structures for a small business
- 1. Sole trader
A sole trader business is where one person owns, operates, and manages the business. This is a structure used by tradespeople, shop-owners, consultants, and other small businesses with one main entity running it.
It is a common structure for small micro businesses. A sole trader is not considered a separate legal entity.
- 2. Partnership
A partnership brings together two or more people who jointly own and manage the business – but not as a company.
Each party contributes funding, labour, and skills to the business, sharing in the income and liabilities according to pre-agreed ratios as detailed in a partnership agreement.
- 3. Trust
Trusts are legal relationships where a person or persons (the ‘trustees’) hold property or income on behalf of a beneficiary or group of beneficiaries.
Trusts are commonly used in family-run businesses. The benefits include tax minimisation strategies, as well as succession planning opportunities to ensure the future of the business.
- 4. Company
Companies are a legal entity in their own right, separate from their owners. A different tax structure and administrative requirements apply.
NOTE: Other business structures exist, however, as a small business owner, these are the four most widely used options. Always seek specialist advice before making your final decision.
Which aspects of your business will your decision affect?
There are six main areas of your business that will be affected by your decision regarding business structure:
- 1. Finances including tax liabilities, superannuation, workers’ compensation, etc.
- 2. Legal controls and constraints
- 3. Administrative burden and costs
- 4. Asset protection
- 5. Personal liability for debts
- 6. Your ability to raise funds
- What size of business are you creating?
- Can you handle a complicated set up procedure?
- How flexible do you need your business to be?
- Do you want to keep admin and reporting simple?
- Are you comfortable accepting full liability?
- Will you need to raise capital?
- Are you comfortable relinquishing some control?