Whether you have an existing business or are just looking to set up shop for the very first time, having the right business structure is a crucial part of protecting your assets. Business structures can range from simple to very complex, and each comes with particular benefits and potential drawbacks.
There are four main types of business structure:
1. Sole trader/sole proprietorship
Operating as a sole trader is the quickest way to get up and running with a new business, and for small solo operations, it’s by far the easiest to manage from a tax and paperwork perspective. There’s very little paperwork required, and as long as you have an ABN, you can generally begin operating right away. However, there are very specific risks that come with this structure. Should you encounter any legal issues, your own personal assets are not protected from any legal settlements. The tax benefits as a sole trader are also minimal.
A partnership structure shouldn’t be taken lightly. While sharing ownership can bring your start-up and administrative costs down, you’ll also need to consider sharing the profit and potential liability. As one half of a partnership, you’re responsible for your partner’s actions and vice versa – so trust is paramount, and so is a solid legal agreement between partners. All obligations and responsibilities should be clearly defined in the partnership agreement.
3. Incorporated Company
Incorporating your business, new or existing, offers you significant protection from liability and protects your assets in the process. Should an issue ever arise, only assets held by the company are at risk. In addition, incorporation opens up the opportunity for future shareholders and has other benefits in being able to apply for certain grants eg R&D and EMDG Schemes. This is a familiar structure in the business community, and is typically the best structure for start-ups and for businesses on a growth and expansion trajectory. It’s strongly recommended to use a professional when setting up an incorporated company.
Technically, a trust isn’t a true business structure. A trust operates as a tool to manage business assets, and an incorporated company may act as a trustee of the trust. Using this setup provides an additional layer of limited liability. However, be warned – this is definitely a task for a professional.
As you assess (or reassess) the level of risk, liability, and administration that’s right for your business, you should consider whether you have an existing business partner and if opening your business to additional partners or investors is something you hope to do in the future. Gauging your appetite for risk and liability is also important; an overly complicated structure isn’t always the best option – but neither is accidentally leaving your assets unprotected.
There’s a happy balance between liability, administrative costs, tax efficiency, and ease of operations. The trick is finding the right balance for your business.
How can Halkin Business Partners help?
Our tax and structure specialists can assess your business plan and recommend a structuring strategy designed to serve your business now and well into the future while protecting your assets. Talk to Halkin Business Partners today to see how we can help.