Before starting a business, one of the crucial decisions you need to make is determining the appropriate structure for your venture.
This choice will impact various aspects of your business, making it essential to understand the implications of each structure before making a decision. In this article, we will explore the key features of different business structures to help you make an informed choice.
A sole proprietorship is a business structure with a single owner who has complete control and authority over all aspects of the business. Setting up a sole proprietorship is relatively easy, without the need for business registration. However, it’s important to note that personal and business assets are not separate, and the owner is personally liable for any debts or obligations. Understanding the implications is crucial:
- Complete control of the business.
- No legal separation between owner and business.
- Personal assets are at risk in case of debt or bankruptcy.
- Low-cost structure to set up.
A partnership involves two or more individuals sharing income and losses within the business. There are three main types of partnerships:
- General partnership (GP) – is where all partners are equally responsible for the management of the business, and each has unlimited liability for the debts and obligations it may incur.
- Limited partnership (LP) – is made up of general partners whose liability is limited to the amount of money they have contributed to the partnership. Limited partners are usually passive investors who don’t play any role in the day-to-day management of the business.
- Incorporated Limited Partnership (ILP) – is where partners in an ILP can have limited liability for the business’s debts. However under an ILP there must be at least one general partner with unlimited liability. If the business cannot meet its obligations, the general partner (or partners) becomes personally liable for the shortfall.
Each type has distinct characteristics and legal obligations, so it is important to follow the specific laws and regulations set out by your state.
In partnership, key features include:
- Shared control and management.
- Obtaining an Australian Business Number (ABN) for business proceedings.
- Partners paying tax on their share of net partnership income.
- Minimal reporting requirements and relatively inexpensive setup.
- Mandatory GST registration if turnover exceeds $75,000.
A company is a separate legal entity, offering liability protection for its members. It incurs debts, can sue or be sued, and requires directors to have a Director ID. While members are not personally liable for company debts, directors may face personal liability for breaching legal obligations. Essential points to consider:
- Separate legal entity from its owners.
- Profits, taxes, and legal liability are attributed to the company.
- Compliance with obligations under the Corporations Act 2001.
- Annual tax returns and reviews.
- Extensive documentation and record-keeping.
- Wider access to capital.
In a trust structure, a trustee holds assets and operates the business for the benefit of beneficiaries. Trusts provide asset protection but can be complex and expensive to establish. The trustee makes decisions regarding profit distribution to beneficiaries. Key considerations include:
- Expensive setup and operation.
- Requirement for a formal trust deed.
- Trustee responsible for administrative tasks.
- Protection of assets.
- Difficult to dissolve or make changes once established.
Choosing the right business structure is a critical decision that will impact your business’s operations and legal obligations. It is advisable to seek guidance from a KMT professional business adviser who can provide tailored advice based on your specific needs and circumstances. By understanding the implications of each structure, you can make an informed choice that aligns with your business goals. Start a conversation with us today to explore the best structure for your business.
About our adviser: Michael Fox has been dedicated to the success of his clients, devising comprehensive wealth strategies for both personal and business growth for over 30 years. With extensive expertise in business governance and family business succession, Michael specialises in empowering emerging businesses and family enterprises by fostering renewal, enhancing value and smooth transitions to the next generation. Please do not hesitate to reach out if you need assistance with your business succession planning for your family business.
This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek tax advice from a qualified accountant at KMT Partners. Information is current at the date of issue and may change.