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Business Structure and Types

By December 18, 2019 No Comments
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Business Structure and Types

Deciding on the business structure and types you adopt will have different implications on Tax, your legal and financial responsibilities and how much paperwork you will need to complete.

Choose a business structure

Typically, most businesses register as a sole trader, partnership or limited company.

If it’s your idea and you’re going to be working on your own, then you should consider setting up your business as a sole trader.

If two or more of you have a joint idea and you’re going to work together, splitting the responsibility and liability, then you should consider running your business as a partnership

If you want to work as a director, on a salary and would rather pay more money into start-up so the company is not your personal liability, then you should consider registering your business as a limited company.  

What business structure is best for a restaurant

Surveys show that for food outlets it is likely that partnerships are the most common form of organisation.  One partner might provide management and accounting skills and perhaps some capital.  The other might handle the buying and day to day running of the business.  Remember, though, that if you opt for a partnership and the business assets are not registered in the joint names of the partners, you will need a written partnership agreement to protect the interests of surviving partners in the event of the death of one of them. 

If you’re not sure about what the correct legal status is for your business, it’s best to speak to an accountant or solicitor who’ll cover the most suitable form of business to suit your particular circumstances.

Can you change your business structure

As your business grows, evolves and changes, it may make sense to change the legal structure of your business.  The good news is that in most cases changing your business structure is more simple than you might imagine.

In the vast majority of cases, small businesses change from a simple business structure (sole or partnership) for a more complex one (company). 

So, when it is time to take the plunge and make a change remember that you should always consult your accountant and solicitor before you make any decisions regarding the structure of your business.

What are business structure types

The following aims to give a general idea of the advantages and disadvantages of the three forms of legal structures for your business.

Sole Trader

A sole trader is an individual who runs the business without partners or a company structure.  This is the simplest form of business ownership and can be commenced with little outlay.  As it is important for the sole trader to keep the business operation separate from personal affairs, you should open a separate bank account for the business and keep separate records.    The sole trader has full control of the business including ownership of all profits and responsibility of all debts.

As a sole trader, you will be liable for taxation as an individual, which means you will be required to declare income from your business in your personal tax return.  You also own all your business assets and pay provisional tax according to the marginal rate of tax for your annual income.

The sole trader can trade under his/her own name, or register a business name.  However, registration of a business name does not make the sole trader, a separate legal entity.  The business belongs to the sole trader who is personally responsible in law.  Registration under a business name has no legal implications other than to allow that individual to use and trade under that name.

What are the advantages and disadvantages of operating as a sole trader:

Advantages

    • Low start-up costs.
    • The owner has direct control and authority over the business.
    • All financial rewards to the owner.
    • No separate business tax return required.
    • Limited record keeping and reporting.
    • No registration of business name required if using own name.
    • Greater privacy

Disadvantages

    • Holidays may become a luxury you can’t afford, simply because nobody else has the skills to run your business while you are away.
    • Personal liability for all debts;  can be sued and lose all your personal assets (including house and car).
    • Liability for taxation as an individual;  need to pay provisional tax.
    • Ownership of the business cannot be transferred to another individual.
    • The pressure of having to make all the decisions and take on all the responsibilities.
    • More difficult to borrow money because some financiers only advance funds based on tangible assets.
    • If you are sick or have an accident, there is no one to run the business.
    • Business ceases on the death of the owner unless special provisions made.

Your accountant or solicitor can give you advice on this decision.

Structure of a business partnership

A partnership is the simplest way for two or more people to run a business together.  You share responsibility for your business’s debts.  You also have accounting responsibilities.

In deciding to conduct business with a partner, it is critical to consider each partner’s strengths and weaknesses, personality and experience; in short, what skills they can offer, the business.

Having someone else in the business can help to spread both the workload and the worry, but unless you know your partner really well and trust him or her thoroughly it could lead to problems.  Each partner is legally responsible for the debts of the business and there is no limitation on this liability – your partner could run off with all the money and you could be left with substantial bills to pay. 

If you and your partner/s have confidence in each others abilities, compatibility and loyalty and if your business is a reasonably ‘low risk’ then a partnership may be the best way to start-up a business.

There is no need to register a partnership, but if you are using more than the partners’ own names as the name of the business or if you are using a completely different name, you will again need to register the business name.

It is advisable that a partnership agreement is drawn up, preferably by a solicitor, and signed by all parties  This will avoid any disputes at a later time.  

Write a business structure

The written agreement defining partners’ relations, and specifying how profits and losses will be divided, generally includes the following provisions:

    • Names and addresses of the partners
    • Name of the business
    • Nature of the partnership business
    • Duration of the partnership
    • Initial capital contribution by each partner
    • Distribution of profits and losses to partners
    • Procedures for partner salaries/personal drawings
    • Partners’ roles within the business
    • Record keeping and accounting procedures
    • Bank details
    • The extent of each partner’s authority
    • Effects of death, bankruptcy, expulsion, incapacity or retirement of a partner
    • Dispute resolution processes
    • Procedures for the dissolution of the partnership

What are the advantages and disadvantages of operating as a partnership:

Advantages

    • Simple and low cost to form and operate.
    • Additional expertise available to the business
    • Additional capital available to the business
    • Taxation advantages – income is split between partners.
    • Shared responsibility and authority of business operators.
    • Possibility of “fall back” in time of illness or vacation.

Disadvantages

    • Unlimited liability – partners usually jointly, or separately liable for business debts.
    • The danger of one partner putting others into debt.
    • Potential incompatibility and/or mistrust.
    • Possible problems within the working arrangements.
    • Maybe difficulties if one partner wants to sell out.

Few people who go into business with their best friend still have that best friend after a few years.  You must decide if you want a friend or a business partner as often they are not the same person.  Be cautious!

Company

If you form a limited company, its finances are separate from your personal finances, but there are more reporting and management responsibilities. Some people get help from a professional, for example, an accountant.

A company is a legal entity in its own right, separate from those who own or manage it.  A company can own property, lend and borrow money and operate its own bank account.  It can sue and be sued, pays it own tax and can be bought or sold.  It must be registered with the Australian Securities Commission and will receive an Australian Company Number (ACN) which must appear on all stationery.

Advantages

    • Shareholders are not liable for the financial commitments of the company.
    • The business continues as an entity on the bankruptcy, death or retirement of an owner.
    • Easier to raise finance.
    • Possible tax advantages.
    • Profits are able to be retained in the company to expand the business.
    • Greater superannuation benefits available.
    • Ownership of the company can be transferred.

Disadvantages

    • One of the most expensive structures to establish and operate.
    • Strict legal regulations and requirements – time-consuming and costly.
    • The necessity to obtain expert advice to comply with the Corporation Law.
    • Separate tax returns required for the company and the individuals.
    • Knowledge of ‘directors responsibilities’ required.
    • Detailed and expensive record-keeping requirements.

Business Structure and Types of Training

Want to know more about business structure and types?  

For a very low investment, why not purchase a copy of: 

How to Keep Within the Law eGuide

NOTHING HAPPENS UNLESS YOU MAKE IT HAPPEN!

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