Different Business Structures
When setting up a new enterprise there are a number of factors to consider and choices to make. One decision that is to be made when building a business is the Structure of that business. To choose a business structure can depend on a lot of things such as, the kind of business you are planning to set up, the number of people you would have working with you, whether you would be working with a partner or as a sole businessman etc. However choosing a structure doesn’t bind a business to carry on with the same structure throughout their business existence. As the business grows or expands, the business owner is allowed to change the business structure as per his/her business needs.
There are four types of Business Structures:
Sole Trader is one of the simplest and inexpensive forms of business structure, where the business owner works independently. In this kind of business structure traders can work under their own name or can choose a suitable name for their business.
This business structure is a partnership between two or more people to run the business together as partners.
This type of business structure is a legal entity with shareholders investing and holding partial ownership while the company is run by directors.
This business structure is set up for the benefit of others. Often family businesses go for this structure so other family members are made beneficiaries without any direct involvement with the business.
A business owner needs to be very careful when choosing a business structure as each business structures may affect the business in different ways. Such as:
- - Choosing a business structure may affect the tax you’ll be entitled to pay
- - Protection of your asset
- - Business costs
Your value in the market as some clients prefers dealing with companies and whereas some deal with sole traders depending on the area and type of business
Whether you need to register for an ABN (Australian Business Number), ACN (Australian Company Number) or both
Now let’s look at some pros and cons of each business structure:
Pros and Cons of a Sole Trader Business Structure
- - business is easy to set up and inexpensive too
- - Minimal legal paperwork and reporting to take care of
- - Easier to change the business structure at a later stage
- - A Sole Trader has complete control over the business and earns income and profit
- - A Sole Trader can pay income tax at personal tax rates
- - The income earned by the business is treated as Sole Trader’s own money
- - There is no difference between business assets and personal assets which means they are both treated the same way and personal assets are at risk in case things don’t work out for the business
- - As a sole trader there is no support and the business may fail easily if you are unable to perform alone.
- - There are less options in case of occurrence of financial requirement for the business
Pros and Cons of Partnership Business Structure
- - Partners work together and share profit and loss as a team
- - The set up is simple with basic paperwork and reporting
- - Partners have the opportunity to plan taxes together as they pay individual taxes based on their own partnership earning and profit
- - In case of a downfall, there are multiple partners to raise capital
- - There are multiple brains that can benefit the growth of the business
- - There’s more security and it is also easy to cease or depart from the business if need be
- - Partners are not treated as employees and are entitled for their share of profit
- - Each partner is equally responsible for any loss incurred by a partner or employee
- - Potential disconnects in terms of profit, power, control and business plan
- - Each partner is liable for business debts and loans
Pros and Cons of Company Business Structure
- - A Company business structure is positively accepted in the market
- - Owners and shareholders are not directly responsible or liable for any loss, the company is
- - There are better chances of raising funds in case of financial requisite
- - Ownership can be transferred effortlessly
- - Financial liability is limited to company assets without having to affect the owners and the shareholders
- - Profits can be reinvested in the company
- - Takes significant amount of time and capital to set up a company
- - Shareholders can’t be held responsible for any loss of the company
- - Many obligations are involved in respect to record keeping, paperwork, legal formalities etc
- - Chances of lawsuit are high in case something goes wrong
Pros and Cons of Trust Business Structure
- - Easier to distribute income
- - Trust structure acts more privately than a company structure
- - Assets are protected and secure
- - It is high-priced and takes a lot of time and work to set up and run
- - A lot of legal liabilities involved
- - Strenuous to make changes to the company once it’s all set up
- - If profits are reinvested in the company, it will make for extra tax
Consider the pros and cons of all types of business structures before you make a final decision. It is also advised to consult an expert adviser to get more information on what structure would best suit your business needs.