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Have you heard of the business owner who lost his family home due to significant business debts? As a business owner you can avoid such an unfortunate event by choosing the right business structure to suit your business and personal needs.

The structure of a business will significantly impact a business’ tax, accounting and legal obligations.

It is, therefore, critical to carefully consider and select a structure which will best suit your business:

  1. When you start a business; and
  2. To periodically review the structure through the life of the business to ensure it continues to suit the needs of your business and your personal needs.

Below is a summary of the four main business structures in Australia, including the advantages and disadvantages of each structure:

Business structureAdvantageDisadvantage
Sole Trader

A business structure with an individual owner

  • Simple and inexpensive to set up
  • Fewer reporting requirements
  • Full control of your business decisions and maximum privacy
  • Easy to change your business structure at a later stage
  • Personal unlimited liability.  You cannot share your business debts or losses with others
  • Personal assets are at risk
  • Personal liability to pay tax on all income derived by the business
  • No business continuity if the sole trader unexpectedly passes away
  • More challenging to raise capital for the business
Partnership

A business structure with 2 or more owners who enter into an agreement to distribute the profits and losses of the business

 

  • Simple and inexpensive to set up
  • Fewer reporting requirements
  • Partners share the debts of the business according to the partnership agreement
  • Better capital raising opportunities than a Sole Trader
  • Tax savings as each partner pays tax on the share of the individual partnership income they receive and not tax on the total income earned by the partnership
  • Partner bears personal liability for the debts of the partnership (however it can be limited)
  • Partners’ personal assets are at risk
  • Partners share control and management of the business with other partners
  • Business profits are shared amongst all partners according to the partnership agreement
Company

A separate legal entity which means that the company has rights like a natural person.

  • Shareholders own the company and have limited to no liability for the business’ debts and/or for legal claims against the company
  • The company can incur debt, sue and be sued on behalf of the business, instead of its shareholders
  • More favorable taxation rates and promotes flexible tax distributions to minimise tax liability
  • Shareholders’ personal assets are better protected
  • The business has perpetual existence
  • Complex structure to set up with higher start up and ongoing costs
  • More onerous and ongoing reporting requirements
  • The company’s directors control the business. Directors must comply with their obligations or they may be held personally liable for the company’s debts
  • The money derived by the business is owned by the company and can only be distributed to its shareholders by way of a shareholders agreement
Trust

A structure where a trustee carries out the business on behalf of the beneficiaries

  • The Trustee can incur debt, sue and be sued on behalf of the business, instead of its beneficiaries
  • The trustee is legally liable for the debts of the business and and/or for legal claims against the trust and not its beneficiaries
  • Trusts offer asset protection by separating the control of an asset from its owner
  • Flexible structure for tax distributions and minimising tax liability
  • Requires a formal trust deed to be set up by a lawyer
  • Ongoing costs and reporting requirements
  • The operation of the business is limited to the conditions within the trust deed
  • The trustee controls the distribution of capital and/or income to the beneficiaries
  • A trust may incur penalty tax rates if it retains profits
  • A trust may be difficult to dissolve if all the beneficiaries do not consent to it

 

As you can see from the above table, there are a number of factors that should be considered when you are selecting the structure that will best suits your business.

At Clarke Hemmerling Lawyers, we are experienced in advising clients on structuring their business so that it best suits and protects them.

If you are thinking of setting up a business, or it you are reviewing your current business structure, please contact us on 08 8333 2130 for advice and assistance to minimize the risks to your business and to yourself personally.

If you would like further information or an obligation free discussion about the matters raised in this blog please contact Kaviytha Raman on 08 8333 2130.

This blog post does not constitute legal advice and should not be relied upon as such. It is a general commentary on matters that may be of interest to you.  Formal legal or other professional advice should be sought before acting or relying on any matter arising from this communication.