Business Structure Basics – Know the Terminology

One of the first things you need to consider as a business start-up is what structure suits your needs and the needs of your business. In order to do this, you must first know the most common business structures as are briefly outlined below.

Sole Trader

This structure means that you individually, as the sole trader, are responsible for all facets of the business, including all business debts and obligations. The benefits of this structure are that it is simple and the setup is low cost. Subject to your expected income, there can be tax benefits as individual income tax thresholds apply.

Partnership

This structure involves two or more individuals (or entities) jointly operating a business or receiving income. The management of the business is shared and therefore it is common for a partnership agreement to be written up. This structure does not create a separate legal entity, therefore, both partners are jointly and severally responsible for business debts and obligations. A partnership is not to be confused with a joint venture, which is two or more individuals or entities coming together for a single project and not an ongoing business. A joint venture agreement should be written up in such an instance.

Company

This structure is more technical to set up and has higher costs for both set up and administration. The largest set up cost is the company registration fee imposed by the Australian Securities & Investments Commission (ASIC), which at the time of writing is $479.00. As a company is a separate legal entity it has the same obligations as a person and therefore, can incur debt. A company is required to be registered with ASIC and obligations must be met under the Corporations Act. These include duties imposed on the directors. The benefit of this structure is the limited liability it affords the shareholders of the company (because the company is a separate legal entity) and the fixed corporate tax rate, which may work out lower than that of high income sole traders.

Trusts

A trust, on its own, is not a legal entity. For this reason, a trust requires a trustee to be appointed. A trustee is the legal entity that is empowered to administer the trust pursuant with its terms. Broadly speaking, a trust grants the right to hold and manage assets or property on the trustee for the benefit of beneficiaries. A trustee can be a person or a company. A formal trust deed is required to set up a trust and yearly obligations need to be met. There are many different forms of trusts that can be created and utilised in particular instances for great benefit. The breakdown of these trusts go beyond the scope of this brief outline, however, will be addressed in later articles.

ASIC recommend that you speak with a professional business advisor, such as a lawyer, before making the decision on which business structure is best for you. We will be going into more detail on the different structures and trust options in the coming weeks. Please do not hesitate to contact Grauf O'brien Lawyers for an obligation free discussion on what structures may work for you.

#startups #businessstructuring #trust #companies #partnerships #jointventures #soletrader

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