Choose a business type

The most suitable structure

Choose the structure that will best suit the needs of your business. Your decision will determine how you have to register your business and which laws you have to observe. It is vital that you understand the legal requirements of your business setup and seek legal advice in making a decision on your business structure.

There are four main business structures that are commonly used in small businesses. In increasing level of legal complexity, these are:

• Sole trader: an individual trading on their own.
• Partnership: an association of people or entities carrying on a business together, but not as a company.
• Trust: an entity that holds property or income for the benefit of others.
• Company: a legal entity separate from its shareholders.

Each has advantages and disadvantages.

(a) Sole trader

This is the easiest method of starting a business. As sole proprietor you will be responsible for all business decisions and deal with all the financial matters.

Advantages

• Low registration fee.
• Simple business structure and documentation.
• You maintain total control over business decisions.
• All profits and capital belong to you.
• Tax benefits exist if profits are low.
• Other than the Income Tax Assessment Act and contract law, no specific legislation applies.

Disadvantages

• Your capital is limited by your personal assets.
• Limited expertise and no one else to share the workload.
• It will be difficult for you to take time off.
• Your responsibilities can cut into your family and holiday time.
• No one to operate the business when you are ill.
• You will be personally responsible for all debts and liabilities.
• It can be difficult to sell ownership of the business.
• There are tax disadvantages when profits are high.

(b) Partnership

A partnership is formed when two or more people go into business together. You can operate under your own names or with a registered business name.

Advantages

• Inexpensive to establish.
• Tax advantages exist if your business partner is from your family.
• Having a partner means more start-up capital.
• Broader range of knowledge, experience and skills.
• Some ability to take time off.
• It is relatively easy to dissolve and recover your share of investment.
• Your partner can sustain the business during your holidays or illness.
• Profits belong to you and your partners.
• Shared control reduces your individual burdens.

Disadvantages

• Potential for disputes over profit sharing, administration and development.
• Personality clashes.
• You will be personally responsible for business debts and liabilities incurred by your partners.
• Your personal assets are at risk to settle partnership debts.
• There can be some taxation disadvantages.
• Conflict on deciding final authority.
• Problems when one person leaves or another wishes to join.

(c) Company

A company is an independent legal entity. You will run the business as a director and own the business as a shareholder.

Advantages

• Your liability for the debts of the business is limited to the money you have invested in the business (unless you personally guarantee debts).
• Your limited liability can make it easier to attract investment.
• You can own and operate as the sole shareholder and director.
• You have no personal responsibility for debts unless the debts are reckless, negligent or fraudulent.
• A company can own property.

Disadvantages

• Large initial establishment fee.
• Complex establishment rules.
• Strict regulations.
• Attract higher compliance costs than other business structures .
• Your business will be subject to company tax.
• Limitations on who can buy shares can make it difficult for shareholders to recover their investment.