Choosing a business structure

by | Jan 20, 2018 | Archives

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

CONS

  • 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

CONS

  • 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

CONS

  • 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

CONS

  • 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.

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