The business structure you choose for your business will affect how you run every operation. For example, it determines your legal and operational risk. Choose the right legal structure for your business. Cherry Black can help you decide what structure is best for you and your business.
In addition, your business structure affects asset protection, tax obligations, legal costs, and clientele. That said, here are four common business structures to choose from:
• Sole Trader
• Partnership
• Company
• Trust
Remember, you can switch from one structure to another as your business grows. However, making such changes is often a complicated procedure. Therefore, it is essential to be careful when choosing a structure for your business to ensure it best reflects your future goals.
Now, let’s look at each structure independently:
1. Sole Trader
A Sole Trader is the simplest of the available business structures. As a sole trader, you run and manage your company under your name. This type of organization is both inexpensive and simple to register.
However, sole trader structures are not particularly versatile and will not be able to handle a developing company. As such, it is only suitable for small enterprises like contractors, home companies, internet retailers, websites, and other microenterprises. In Australia, single traders make up the bulk of small business owners.
2. Partnership
A partnership is a group of two or more persons who work together to run a business. The process of forming a partnership is straightforward and quite inexpensive. The structure, however, has several drawbacks.
In this arrangement, partners are jointly liable for the company’s debts. As a result, it’s critical to think carefully about who you join a partnership with because all partners are jointly responsible for the acts of the others. To be safe, a partnership agreement should be in place that spells out how the relationship will operate.
3. Company
When you’re running a rapidly growing business, this structure is the best to use. This is because a company operates as a separate legal entity from its owners. As a result, stockholders are only accountable for debts or obligations incurred by the firm up to the value of their unpaid shares.
This structure is also suited for high-risk businesses because of its limited liability nature. In addition, the structure is best for starting firms because it allows them to raise funds and grow by issuing shares.
The corporations’ act is what governs companies and they must fulfill all their statutory responsibilities. Lastly, a shareholders agreement should be in place if your organization has more than one stakeholder.
4. Trust
A trust is another structure you can use to run your business. Normally a trust is managed by a trustee, who is either human or a corporation. It is the trustee’s responsibility to disburse profits to the trust’s beneficiaries as per the trust agreement.
If a trust has a single trustee, that trustee is personally responsible for the trust’s debts. On the other hand, if a trust has a commercial trustee, the shareholders are protected by the organization’s limited liability.
Keep in mind that trusts are charged a marginal tax rate of 49%. This means that the structure is not suitable for businesses that need to re-invest their earnings. Lastly, unit trusts require a unit-holders agreement whereas a corporate trustee requires a stakeholders’ agreement to govern them.
Wind Up
Choosing the appropriate legal structure is an important aspect of running any business. Therefore, it’s essential that you understand each structure and what it entails.
