Choosing the right business structure for your startup.
Structuring your business properly and effectively from the outset is crucial. The type of structure you choose initially will affect the way you do business now, and in the future, and it can be critical down the track when it comes to raising funds or even planning an exit.
How to Structure a new Business
The right structure for your startup will have implications for tax liabilities, asset protection, responsibilities as a business owner, your own liabilities and more, so it’s imperative that you consider these things when you’re in the early stages of setting up your business.
By having regard to your future goals, you can set up your business for success from the outset.
Different Business Structures in Australia
There are many different types of business structures, however the most common are:
Sole Trader - trading as an individual.
Partnership - trading with one or more other people.
Company - a legal entity separate from its owners.
Trust - an entity that holds income on behalf of its owners.
Sole Trader
A sole trader is a simple, cost-effective and relatively easy way to operate a business. You can trade under your own personal name (so you don’t have to register a business name) and there are minimal reporting obligations, making this a simple and cost-effective way to operate a business.
It is important to note that if you’re operating as a sole trader, there is no separate legal entity and you have personal liability for the debts and obligations of the business. Whilst this structure may be appropriate for small businesses, if you have plans of scaling the business and bringing on other owners or investors, this is probably not the right structure for you.
Partnership
A partnership is a relationship which exists between two or more persons carrying on business with a view to making a profit. A partnership structure is relatively simple to set up and has minimal reporting requirements. However, like a sole trader, a partnership is not a separate legal entity and the business owners are personally liable, jointly and severally, for all debts and obligations of the business.
Joint and several liability means that the partners operating under a partnership jointly promise to do the same thing and severally promise to do the same thing. This means that any one, or all, of the partners in a partnership can be sued by a creditor for an unpaid debt.
If you’re looking to scale your business or raise funds at some stage, a partnership may not be the right business structure for you, and you may want to consider incorporating a company instead.
Company
A company is a separate legal entity and, for this reason, is a common structure for those looking to grow their business. A company’s owners (i.e. its shareholders) have limited personal liability and are therefore not personally liable for the debts and obligations of the company (except in certain circumstances). Like an individual, a company can incur debt, sue and be sued. Companies can also raise capital, making this a popular business structure for those looking to scale their business.
However, it is important to note that there are generally more compliance obligations for a company which tend to increase setup and ongoing costs. Further, as a director of a company, you must comply with your director duties and certain other obligations.
If you’re looking to establish and grow your business, a company structure is probably the most appropriate structure for you, but you should be aware of your obligations if you decide to go down this path.
Trust
You can also operate your business via a trust whereby a trustee carries out business on behalf of its owners (i.e. the trust’s beneficiaries). This structure is typically used for tax (income distribution) and asset protection reasons.
The trustee may be a company or an individual which, in any event, is liable for the debts and obligations of the trust. This is because a trust is not a separate legal entity.
Trusts can be costly to set up and complex to dissolve, so consideration must be had before operating a business via a trust. If you do decide to go down this path, having a corporate trustee (opposed to an individual) may be preferable due to the protection it affords from liability.
So which business structure should I choose?
The right structure for you will depend on what your plans for your startup are. If you plan on scaling the business, taking on investment or new owners and maybe one day planning an exit, then incorporating a company is likely the best way forward.
If you’re happy carrying on business alone and don’t plan to take on any outside investment or new owners, a sole trader might be suitable for you. However, a company should still be given due consideration for the considerable protection it may afford from liability.
In any case, however, you should turn your mind to tax implications when choosing the right structure for you, so we would always recommend speaking with your tax adviser first.
If you’re not sure which structure is right for you, get in touch with our team or enquire about our Set Up Pack.
Do you need help getting started?
The AGH Startup Hub is a dedicated place for startups and entrepreneurs to access legal services in a way that works for them.
Within the AGH Startup Hub we offer a range of fixed price Document Packs to suit your startup. Each Document Pack has been carefully curated by our lawyers to give you the high-quality essentials that you need, even including website terms and conditions, at an affordable fixed price.
We understand that you may not want or need overly complex legal documents. You also don’t want to risk it by using a template document you found online. You just want quality legal essentials to protect you and your business, and to help you get back to business.
We can advise you on the best way for you to structure your business, taking into account any important considerations, and then prepare all of the necessary documents for you. In this Set Up Pack you will receive everything you need to get started and a 30 minute consultation with a dedicated lawyer, all for a fixed price of $1,500 (incl. GST).
Get in touch with our AGH Law team to get started or learn more about our fixed price Document Packs.
Important
The contents of this publication should not be relied upon as legal advice, but instead as commentary and general information. Specific legal advice about your circumstances should always be sought separately before taking any action based on this publication.
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