What type of business structure will suit my new business?

Many new business owners are unaware that the type of business structure they use to purchase their new business will determine their risk for personal bankruptcy, litigation and their level of asset protection.

When making such an important decision, it is recommended that you obtain legal advice so that the business structure chosen will reflect your personal circumstances.

There are several types of business structures available.

1. Sole proprietor

If you decide to operate your business as an individual then you will be defined as a sole proprietor. This means that there is no separate legal entity for the business and that you have total control over the business.

There are no special requirements to commence operating as a sole proprietor other than compliance with various State legislation, which requires registration of your business name.

The advantages in operating as a sole proprietor include the following: 
(a) Minimal reporting requirements. 
(b) The ease in which you can set up and dismantle the business structure. 
(c) Income from the business will be taxed at your personal income tax rate and you will be able to offset any losses against your other income. 
(d) You will be entitled to claim a large Capital Gains Tax discount. 
(e) You will minimise costs in relation to superannuation contributions and payroll tax.

The disadvantages of operating as a sole proprietor include: 
(a) You will have an unlimited liability. The term, unlimited liability means that any creditors of the business will be able to attack your personal assets to satisfy any outstanding business claims. 
(b) The business will end when you retire or on your death. 
(c) The reporting requirements to claim for “fringe benefits” are quite rigorous.

2. Partnership

If you decide to operate your business as a partnership, you will be operating as an association of individuals for the purpose of carrying on the business with a view to making a profit.

The number of partners allowed in a partnership is governed by the Corporations Act 2001 (Cth) and in most instances will be limited to twenty partners. However, the law allows certain professions to have more than twenty partners eg. architects are allowed to form partnerships with one hundred partners.

The most common and effective way to establish a partnership is to enter into a written partnership agreement. A partnership agreement is a binding legal document and it is important to make sure that it reflects the intention of the partners.

The partnership will need to establish a bank account, arrange for registration of the business name of the partnership and ensure that all assets of the partnership are held in the names of all partners.

The advantages in operating as a partnership include: 
(a) Each partner’s share of the partnership income will be taxed at the personal rate of the partner. 
(b) A partnership agreement can allow for flexibility in relation to the share of profits and losses of the business. 
(c) A partnership agreement can allow for the capital of each partner to be increased or withdrawn from the partnership.

The disadvantages in operating a partnership include: 
(a) All partners will be joint and severally liable in relation to any liabilities of the partnership. 
(b) A change in the membership of the partners may constitute a new partnership unless the partnership agreement is altered.

3. Company

You may choose to use a company to run your business. A company is a separate legal entity which means that you will not have an unlimited liability in relation to the debts of the company.

A company consists of shareholders who are the owners of the business and directors who have the day-to-day control of the company.

The advantages in operating your business through a company include the following: 
(a) The liability of the shareholders is limited unlike sole proprietorships and partnerships. 
(b) There are tax benefits in operating as a company such as tax deductions for superannuation contributions and tax deductible retirement payments to family members.

The disadvantages in operating as a company include: 
(a) The commercial costs involved in ensuring company compliance with the Corporations Act are quite high. These costs include annual filing fees, accounting fees and legal fees in relation to the accountability of directors. 
(b) Operating as a company means that you will become an employee of the company which will mean you will have to make compulsory superannuation payments.