Choosing a business structure

So you’ve decided to go into business. Hopefully you’ve taken my Entrepreneurs test to see if you’re a good fit…..some people make great employees and it’s not a bad thing. There’s so much hype in the world about starting your own business. The reality is, it can be really freakin’ hard (and very rewarding on the flip side), but it’s not for everyone – and not wanting to go down that road does not make you a failure!!!! If it is for you though, then what Business Structure do you go for? I’m targeting this for my Australian clients – so if you’re in another neck of the woods, please check your government requirements – they’re usually surprisingly helpful about this kind of thing. Let’s go………… The main business structures to choose from are:
  • Sole Trader Samantha Leith, Smart Not Hard
  • Company
  • Partnership
  • Trust
There are also other options for organisations like charities, but we won’t go into that here. It’s just important to know that apples ain’t apples – so choose the one that’s right for you. There are lots of differences between the business structures, so let’s touch on a few of them. However in general, the business structure you choose impacts things like asset protection, taxation rates, running costs and simple things like how you feel about it and how clients look at you on a professional level. I know, crazy right? Believe it or not, there are some people out there that still think a Sole Trader just hasn’t gone professional. Little do they know that for some people it’s the perfect choice. Less paperwork, their own terms and simple taxation are just a couple of the reasons. SOLE TRADER Basically an individual running a business operation either under their own name, or a business name. PROS
  • It costs bugger all to set up and run
  • You have full control
  • You have access to all the profits
  • Capitol investment is yours
  • Easy to exit
  • Paying personal income tax rates
  • Possibly Personal Services Income issues
  • Liabilities are yours alone
  • You are responsible for everything
  • Not easy to sell
One of the biggest issues I (with my Business Coach cap on) have with being a Sole Trader is that there is generally a deeper reason why you want to stay a Sole Trader Business Structure…….fear of failure. It’s like getting a company will set you up for failure. It’s doesn’t, and neither does being a Sole Trader – however, the financial limitations being a Sole Trader may stunt your business growth in the future. In Australia you need to use an ABN, and your personal Tax File Number as a Sole Trader. Then there’s the GST. If you plan on turning over more than $75k a year, then you need to register. I always think you should plan for growth, so generally recommend GST registration for most people, however it does mean more paperwork. Also, with a Sole Trader Business Structure, you will need to take care of your own superannuation, holiday, sick pay etc etc. Superannuation can be claimed as a business deduction, but you need to get confirmation from your fund etc. If you a just dipping your toes in the business world (or Entrepreneurland as I call it) then a Sole Trader may be perfect for you. COMPANY It’s a registered business entity with shareholders, directors etc. It’s regulated by ASIC and bound by lots of rules and regulations. PROS
  • Can be owned and run by the one person (shareholder and director)
  • Better taxation rates
  • You will find it easier to get finance
  • Shareholders are not liable for the debts (unless they signed a personal guarantee)
  • Directors, employees etc have limited liability (unless fraud or negligence is involved)
  • Easy to set up succession plans, or build it to sell
  • Costs a lot more to set up
  • Paperwork and general compliance never seems to end
  • Additional payroll obligations (like superannuation)
  • Higher costs (like insurance)
  • More complicated accounting
  • Harder to dissolve
For me, I like companies. They aren’t that hard to set up and as long as you have good systems in place and have a good accountant, it’s not that complicated. The taxation benefits far outweigh the cons in my eyes. Keep your eye on the ball though, because once your accounts get in a tangle…..arghgghg. There’s something a little more prestigious for some people when they see the Pty Ltd at the end of your name. It’s not that big a deal – but hey, it’s important to some people. If you’re planning on growing a serious business, turning over 6 or 7 figures and wanting to not be the only person that does everything – then I think it’s the business structure to go for. PARTNERSHIP A business marriage so to speak. 2 or more people (can be companies) that are in business together – under their own names or a business name, and want the same thing (hopefully). Can you hear the undertone there??? Yes, I was burnt badly by a partnership, so I’m not so keen on them – maybe that’s why I’ve never been married. However, I know lots of people that have done it really well. PROS
  • Pretty cheap to set up
  • Access to finance (well more than a sole trader)
  • Some tax advantages
  • You get to share brain power
  • Uncomplicated to dissolve
  • Drama over money and / or the general running of the business
  • Equal responsibility for everything (even if the debt is run up by the other partner)
  • One of the parties can dissolve the partnership
  • More complicated taxation and general compliance (than sole trader)
OK so a Partnership is not my favourite type of Business Structure (could you tell), but I promise it does work for some people. If you don’t have issues – such as both wanting to be out marketing and neither of you wanting to manage the employees then you may be ok. Partnership documents are not essential, but very very advisable. DO THEM!!!!!! Speak to a specialist in this area. Superannuation, PSI and GST are all part of the mix again, and you have to lodge individual and partnership tax returns (not that complicated if you have a good accountant). TRUST A Trust is a Business Structure that operates for the benefit of others. It can be very complicated – but when done the right way, for the right reasons, can be the way to go. The Trustee of the Trust, can also be a company – which is a bit like going around a merry-go-round if you think about it in some ways. I’m not going to go into a lot of details, as they can be very complicated, so if it’s something you are considering you really really need to employ the services of a professional. PROS
  • Taxation (depending on the set up, wording etc of the trust
  • Reduced liability
  • Profit distribution is generally flexible (again depending on the set up, wording etc)
  • Succession planning
  • Expensive to set up
  • Continued compliance (paperwork and more paperwork)
  • Trustee come under different rules
  • Can be hard to raise finance
Again, I’m going to admit I don’t know lots about Trusts, but they do have lots of paperwork and can be difficult to untangle. If you are keen – because someone has pointed out the benefits to you (like taxation) then pay the $$ to do it correctly. You will not regret it – I have lots of friends that run everything, including big property portfolios in a Trust Business Structure and they love it. You will still need an ABN, GST registration (if over the limit) and Tax File Number……just follow all the rules people. That’s my rule. There you have it, as I said there are other things you can do, especially as a not for profit – but for most of you reading this blog, these will be the only ones you need to know about. Think about where you want your business to get to as part of the thought process when deciding on your Business Structure. If you never want to earn over $100k, I’d probably stick to being a Sole Trader. If you see a bigger picture – then I’d go a Company. Partnerships and Trusts are not for the faint hearted – but can rock if it’s perfect for you. Just be clear from the outset.

The importance of defining what you do

Please allow me to introduce myself For some people this isn’t an issue. Think Neurosurgeon, tv presenter, child care worker or accountant. Easy, title right there – however they could all go into greater detail about who they work with, what they do and why. For some of us with more fluid businesses it can be really bloody tricky! Sometimes you just want to smile sweetly and say ‘stuff’. That’s not going to get you any clients. Take me for example. I have done crap loads of training – all of which help me do what I do, but doesn’t really define what I do. When someone asks me that dreaded question “so, what do you do Samantha?” I generally reply with “help business owners get their shit together”. If they like that, I then usually go into further detail. There’s also so many places where you are asked and need to explain – so you’ve got to be really confident in your explanation, your elevator speech, grab, business bio etc etc. When I travel I have a terrible time with this. You know the Departure and Arrival cards that you have to fill in – over the last few years I’ve put everything from Business Owner, to Coach to Speaker – I hope they never match them all up!!!! Defining what you do So what’s the secret formula? Well, I don’t think there is one, because you have to say and write what feels good to you and what your ideal clients will understand. Sure you can fill in the spaces like this example: Hi, my name is (insert name). I help (insert avatar), with (insert the problem you solve) to (insert the result). BORING AS BAT SHIT if you want my opinion, and I’m guessing you’re reading this post, because you like my opinion (well hopefully). By the way, I have no knowledge in bat shit at all. How do I like to do it? Well, I like to nut it out a wee bit more. So here are my Top 5 Questions to ask yourself when defining what you do:-
  1. Who is the ideal person you want to work with?
  2. What is their biggest pain point?
  3. How do you solve this?
  4. What’s the outcome / result for your clients?
  5. What’s unique about you and how you work?
Put that all together and you can say something great. Let’s look at some examples:- Kathy sells candles made in China with 100% soy wax, fab fragrances and they look great. Now whilst Kathy could say ” I export candles from China” and people would kind of understand, how much better is it if she says “I work with mass market retailers all over the world to supply amazing soy candles that look and smell fantastic at reasonable prices so their clients can always find that special gift they’re after”. How much better does that sound? David created an app that tracks your budget, warns you when you’re spending too much and tells you when bills are due. He could say “I built an app to track your money”, but “I’ve created a simple phone app for the non technical to be able to create and monitor their household budget so that at the push of a button they can modify it, be reminded when a bill needs to be paid and be alerted when they are creeping up to their limits.” It’s a long explanation, but when it comes to money, most people like more details. How about Sally. Sally is a bookkeeper who works with people with online businesses. She used to say ‘I’m a bookkeeper’. Now she says “We manage the books for fabulous entrepreneurs and we do it all virtually, including those dreaded Paypal buttons, so they can concentrate on what they do best in business, while we take care of the bottom line.” Now we all need a Sally in our business!!! Last one – Mary. Mary creates cd’s and podcasts for weddings. Mary says this when asked ‘the’ question. “I help bridal couples come up with the perfect playlist to celebrate their union. It’s then produced as a cd, podcast or both for them so they have an incredible memento to give their guests on their special day, rather than a bag of sugared almonds”. Now apart from the fact I’ve never been married I LOVE this idea. I did it once for some friends and always thought it had legs as a business… which one of you is going to be clever enough to do it? Defining what you do is not that hard and I really encourage you to have a play around with it. Sometimes it’s easier to expand more in one area.. For example if you are a masseur you probably want to make more of the pain that people want solved when they come to see you. If you’re a copywriter, you probably want to make a bigger point about the increase in sales people can have when they have great copy. Keep your eyes on the downloads page, because I’ll be putting a worksheet up very soon for this exercise. As for me – what do I do? Arghghhghghghg. Help business owners get their shit together…………..I specialise in working with product based businesses – because I like stuff and my background has been mainly working with people that sell physical products. I’m a Business Coach. I’m a Speaker. I’m a Business Strategist. I’m a Mum. I’m a Writer. I’m a Systems Superstar. What does that spell?? Seriously, I felt like I was cheerleading as I wrote that. I’m not giving that away – you’ll have to ask me next time you see me…..hee hee. And if you want to know how I do it – well you’ll have to head on over to the Work With Me page to find out.