If you are looking to start, purchase a business or are already operating a business, you need to consider what structure is appropriate for you.
Utilising the correct entity is integral as it has broad implications in relation to taxation, governance and operations. There are many factors to consider when determining which structure is appropriate for your individual circumstances and it is essential that both legal and financial advice is obtained.
The four most common business structures are outlined below:
A sole trader is an individual person that operates a business. This structure is appropriate where an individual is responsible for the business. Many small businesses commence as sole traders.
There is no limit of liability for sole traders, meaning that a sole trader is legally responsible for all aspects of the business and their personal assets are at risk.
Even though one person is responsible for the business, a sole trader can employ other people to work within the business.
A partnership is used were multiple people or entities are operating a business together but have elected not to incorporate. There is no limit on liability under a partnership, meaning that all partners are personally liable for any debts of the business. Further, one partner may be liable as a result of another partner’s actions.
When operating a partnership it is advisable that a partnership agreement be entered into between all partners. A partnership agreement is recommended to govern the partners and sets out the obligations of the partners in respect of the partnership and business. A partnership agreement can be particularly pertinent in the event of a dispute between the partners. A partnership agreement can be implemented for both established and new businesses.
A company is a separate legal entity which in many respects has the same rights as a natural person. A company can sue, be sued and incur debts. A company is owned by its shareholders. Shareholders receive profits of the company through the payment of dividends. A company is operated by the company’s directors, who can be personally liable for many of the company’s obligations including taxation, debts and occupational health and safety matters. Therefore, whilst a company can operate to limit liability, the assets of a director can still be at risk.
Unlike a sole trader, a company has additional administration and establishment costs and extensive compliance obligations. Having said that, a company is the desired entity for operating a business from both a legal and financial perspective.
Where a company has more than one shareholder, it is recommended that the shareholders of a company enter into a shareholders agreement. A shareholders agreement governs the shareholders of a company and generally prescribes the payment of dividends, obligations of shareholders, dispute resolution, dead lock mechanisms and so forth. Like a partnership agreement, a shareholders agreement can be adopted for both current and new businesses.
A trust is an entity that holds property (including businesses) or income for the benefit of the beneficiaries of the trust. A trust is administered by a trustee that can be either a corporate trustee (a company) or a natural person. A trustee has significant obligations to the beneficiaries and there can be serious ramifications for a trustee that breaches their duties.
A trust can provide a degree of asset protection, particularly where a corporate trustee is used. A trust is often used to hold shares.
For further advice in relation to which structure is right for you and your business or entering into any ancillary agreements in respect of your existing structure contact our Corporate & Commercial team on 03 5273 5273.