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The Pros & Cons Of Each Business Structure: A Breakdown – Lawpath

The Pros & Cons Of Each Business Structure: A Breakdown – Lawpath

Want to start a business but not sure how to structure it? Read this guide for a definitive breakdown of the pros and cons of each business structure.

5th October 2018
Reading Time: 3 minutes

You’ve made the decision that you want to go into business – congratulations! The first steps can seem daunting, especially when making decisions about how to structure your business in a way that works for you and your business mission. We have devised a breakdown of the pros and cons of each business structure to make this decision a little easier for you.

It is important to carefully consider the differences between the structures. Seeking legal advice before deciding can be helpful in making the right choice. LawPath can connect you with business lawyers who can help you make this important decision and ensure you understand the implications of the business structure you choose.

Sole Trader

A sole trader is a person trading as an individual solely responsible for all aspects of the business.

Pros

  • Cheap and easy to set up
  • High degree of control over the business
  • Income belongs solely to you
  • No business TFN is required

Cons

  • There is no limited liability and your personal assets are at risk. If you incur debt, creditors may have a claim on your personal assets to dispense with the debt
  • Income is taxed at individual income tax rate

Example: Jenny has a lawn-mowing business which she is solely responsible for. Jenny hires sub-contractors to help her meet demand, but they have no involvement in the business decision-making.

Company

A company is registered and becomes a separate legal entity. This gives the company the ability to act as a ‘natural person’ and enter into agreements as its own entity. This structure is best suited to medium to large businesses due to the higher running costs. Companies need to be registered with the Australian Securities and Investments Commission (ASIC). LawPath can assist with this process and offers expedited ACN registration.

There are two types of companies: a proprietary and public company. A proprietary company is private and cannot raise money through public offerings. The characteristics of a proprietary company are:

  • No more than 50 non-employee shareholders
  • At least one shareholder
  • At least one director

In the alternative, there are public companies. These companies can raise money from the public by selling shares. Consequently, the shareholders are the owner of the business. Directors are responsible for the business decisions of the company. The requirements for a public company are:

  • At least one shareholder
  • At least one secretary
  • At least three directors

Pros

  • Limited liability applies so personal assets are safe. As the company is a separate legal entity, the only assets accessible for debt purposes are those held by the company

Cons

  • High costs and difficult to set up
  • High reporting and compliance requirements under the Corporations Act 2001 (Cth)

Example of a Company: Good Business Pty Ltd was registered as a company in 2016. It has 30 non-shareholder employees and 3 directors. The personal assets of shareholders are safe from operational debts due to limited liability.

Partnership

A partnership is established where two or more people run a business together. The partnership can be limited in that one of the partners does not play any role in the day-to-day management of the business. They are a limited partner in that their liability is limited to the amount they contributed to the business. A partnership agreement can be helpful in ensuring all parties understand their rights and obligations in the partnership.

Pros

  • Inexpensive
  • Easy to set up and operate
  • High degree of control over the business
  • Shared legal responsibility for the business amongst partners

Cons

  • There is no limited liability therefore your personal assets are at risk
  • The tax rate applied is the individual income tax rate
  • Personal differences amongst partners may impact the operation of the business

Example of Partnership: Eileen and John operate a renovation business. They are equal partners in the business and share the income generated which is taxed at their individual income tax rate.

Trust

A trust structure is used when a business or assets are held for the benefit of others. The people benefitting from the business or assets are beneficiaries. The person holding the benefit for others is called the trustee. Trustees are responsible for everything in the trust and are required to report income through a trust income tax return.

Pros

  • Beneficiaries are not liable for debts of the trust
  • Useful for protecting the income or assets of a young beneficiary

Cons

  • Costs are high and the process of setting up is complicated. You will need to engage a trust lawyer to assist you with this
  • As a trustee, you take on a lot of personal responsibility
  • There are additional reporting requirements for this structure

Example of a Trust: Max is a trustee for a business held on trust for his 17-year-old niece.

Conclusion

Deciding on the right business structure warrants careful consideration. If you need further advice about what to choose, connect with a business lawyer who can discuss the options on a more individualised basis for your business.

Don’t know where to start? Contact us on 1800 529 728 to learn more about customising legal documents and obtaining a fixed-fee quote from Australia’s largest lawyer marketplace.

Author
Ashlee Johnson

Ashlee is a legal intern working in the content team at Lawpath. She is interested in information technology law, and all things innovation. Ashlee is currently completing a Dual Degree of Law/Commerce at the University of New South Wales.