A business structure is one of the first things an entrepreneur needs to think of
By Geoffrey Shiff
If you’ve got a great idea for a business, but don’t know what type of business structure would be best for you, you’re not alone. Most first-time entrepreneurs have the same doubts. Deciding which structure to choose involves weighing up the benefits and disadvantages of each type, with the objectives and initial resources of the business. For instance, the major types of business ownership are: sole trader, partnerships, companies, and trusts.
Which model you choose will affect how the business is structured and what rules may apply to the business. Accordingly, having the right structure in place from the beginning of your enterprise can save you time and money.
A sole trader business is owned by one person. This type of structure is usually employed by professionals who work for themselves, such as consultants and small enterprises.
The benefits of being a sole trader include that it is a structure that is relatively easy (and cheap) to set up as there are few legal formalities involved. The owner retains complete control of the business and retains all profits.
The main disadvantage of being a sole trader is that the owner is personally and solely responsible for the debts and losses of the business can be considered.
When the business involves between two and twenty owners, a partnership can be considered.
A partnership structure is relatively inexpensive and easy to establish, but still allows the partners to pool their skills and resources.
In deciding whether to operate a business as a partnership, one needs to consider the likelihood of conflict between proposed partners. Conflict within a partnership can seriously impede a business and disputes can be costly and time consuming to resolve.
It is also important to remember that each partner remains personally liable for the debts and losses of the whole partnership.
It is best to have a written agreement between the partners drawn by a lawyer before commencing business setting out the rights and obligations of each partner. If there is no written agreement the partnership will be regulated by the relevant State partnership law.
Establishing a company creates a legal entity. Its shareholders are the owners and the directors are responsible for the day-to-day conduct of the company. Companies are regulated by the Australian Securities and Investment Commission.
A company structure separates the owners from the business structure and its control.
The company structure also provides flexibility for changes in ownership. Fundraising can be easier because of the opportunity to sell and transfer shares. The sale of shares is regulated by the Corporations Act and the Australian Securities and Investment Commission is well as the governing documents of the company.
The Constitution of the company and Shareholder Agreements set out the rights, and obligations of each Shareholder in conducting the business and on transferring of shares. The great advantage of a company structure is that it limits the personal liability of the director or shareholders, although the courts and legislation are expanding the scope of liability of directors in areas such as taxation and other areas of legal compliance.
Company reporting obligations and the ongoing and significant, legal, accounting and management costs should be considered.
Some business-owners – particularly those involved in family businesses – choose to operate their businesses under a discretionary trust structure. Trusts can be established to hold property and conduct business through a trustee which is generally a company which receives income and make distributions to beneficiaries.
Unit trusts can be established to own a business and distribute profits to unit holders but Trusts also generally have a Corporate Trustee. Unit Trusts frequently have Unit-holder Agreements prepared by a lawyer which set out the rights and obligations of the unit-holders.
Not for Profits
If an enterprise has objectives other than the making of profit, appropriate not-for-profit structures may include clubs, societies, associations and companies limited by guarantee.
This general overview is not intended to be legal advice. Choosing your business structure is an important decision that may impact the licenses you will need to operate, the way you can deal with other businesses, the protection of your family’s assets, the tax you will need to pay, and your financial obligations. It is a decision that should be made in consultation with accountants and lawyers.
The writer works with Shiff & Company, trusted advisers and lawyers to several start-ups. Readers of Indian Executive are invited to contact (firstname.lastname@example.org) or Alexandra Farrar (email@example.com) for a no-cost consultation of 30 minutes to discuss their legal needs.