During COVID we have seen various new companies coming to fruition. Some of these have been months in the making and others are being created overnight. It is very important that when creating these new companies you research and decide which business structure will suit you best.
Understanding the legal obligations and issues that may arise when setting up a small business will ensure you get it right from the very start. When deciding which business structure suits you best, you should take into consideration:
- The type and size of your business;
- Establishment fees and maintenance costs;
- Tax obligations; and
- The level of asset protection.
Once you have defined the above points you can then choose which business structure will work best for you:
- The most simple and inexpensive form of business structure to set up;
- The structure consists of an individual trading on their own and operating under their own name or with a registered business name;
- Registration of a business name does not make the sole trader a separate legal entity. The sole trader controls and manages the business and is personally responsible for all debts and liabilities;
- It is relatively simple to change this type of business structure if the business grows and it is also simple to close down this type of business.
- A partnership is formed when 2 or more people (up to 20) carry on business together with a view of making a profit. They may operate under their own names or with a registered business name;
- A partnership is not a separate legal entity;
- Liability is unlimited (unless you are in a Limited Partnership) and extends to debts incurred by a partner without the knowledge or consent of the other partners;
- Partnerships don’t pay tax on the income earned by the partnership. Instead, each partner pays tax on their share of the partnership profits at their individual tax rate.
- A proprietary limited company is a more complex business structure formed by at least one, but not more than fifty, shareholders who wish to operate a business as a separate legal entity;
- Under the law, a company is considered a “person” and can therefore incur debt, sue in its own name, or be sued;
- The shareholders own the company and the directors run the company;
- Liability of the shareholders is limited to the value of the shares;
- A company often offers a greater level of asset protection as opposed to some of the other business structures, as a shareholder’s personal assets are separate from the business;
- Companies are regulated by the Corporations Act 2001 (Cth);
- There are costs associated with registering a company and the company is taxed on all profits;
- Establishment and ongoing administrative costs associated with the company’s compliance with the Corporations Act are usually higher than costs associated with running a business as a sole trader or through a partnership;
- Companies must register with the Australian Securities and Investments Commission (ASIC);
- All companies are allocated an Australian Company Number (ACN). This is different to an Australian Business Number (ABN);
- Companies must be registered for GST if the annual GST turnover is $75,000 or more.
- Companies must lodge annual company tax returns with the ATO.
- A trust is a business structure whereby the trustee holds property and earns and distributes income on behalf of the beneficiaries. One of the most common types of trusts is a discretionary or family trust;
- For discretionary trusts, profits are distributed to the beneficiaries at the discretion of the trustee(s) and can, therefore, be distributed in such a way to minimise tax, such as by distributions to beneficiaries in lower tax brackets;
- A trust often offers a greater level of asset protection as opposed to some of the other business structures.
Please download our free Business eGuide for further information that may assist you in your business. Alternatively, please contact our Commercial Division on 9525 8688 for a free preliminary consultation or email us at email@example.com