What is the right business structure for my business?
This is a question that many business owners struggle with because there are different types of business structures, and each one has its own strengths and weaknesses, so deciding which one is suitable is not an easy decision,
In this blog post, we will discuss the four most common business structures:
- Sole trader
- Limited liability company.
We will also detail some brief pros and cons of each one so that you can understand what they present in respect to their suitability as a business structure that might be right for you!
A sole trader is a business owned by one person.
The owner has full control of the business and can make all of the decisions. The sole proprietor is also responsible for all of the business’s debts and liabilities.
Strengths: easy to set up and run, no paperwork or separate fees, the sole proprietor has full control.
Weaknesses: unlimited liability (sole trader is responsible for all debts and liabilities), the business ceases to exist if the owner dies or becomes incapacitated, personal assets are exposed to the business risk.
A partnership is a business owned by two or more people or entities.
The partners share responsibility for the business and make decisions together. The business often trades under a registered business name, it is important that the partners have a partnership agreement in place to detail their agreement on things such as profit sharing and what process is to happen when the partnership comes to an end or in the case of a dispute.
Strengths: easy to set up, multiple owners can share the workload, and can pool resources to start the business. Profits are shared and partners are only responsible for paying tax on their own profit share.
Weaknesses: unlimited liability (partners are jointly and severally responsible for all debts and liabilities), the business ceases to exist if one partner dies or becomes incapacitated, and partners may have disagreements about the business.
A company that conducts a business is legally separate from its owners.
The owners of a company are the shareholders. The shareholders elect a board of directors to make decisions on behalf of the company.
Strengths: limited liability (shareholders are not usually personally responsible for the debts and liabilities of the Company), the business can exist indefinitely, Companies have a fixed tax rate regardless of the level of profit and generally can be easier to raise capital.
Weaknesses: Can be more expensive to establish, maintain and wind up, reporting requirements can be more complex, Directors must meet their legal obligations
A Trust is an entity for the purposes of tax administration, and it holds either Trust property or conducts a business for the benefit of beneficiaries. The management of the Trust is done by a Trustee who is usually separate from the beneficiaries.
Strengths: limited liability (beneficiaries are not responsible for the debts of the Trust) Separation of ownership and Control provides flexibility in taxation outcomes and succession outcomes.
Weaknesses: Can be complex to set up as a Corporate Trustee is often also required to be formed, powers of the Trustees are restricted by the Trust deed, depending on the type of Trust, beneficiaries may only have beneficial rights not equitable rights to the assets and income of the Trust.
Choosing the right structure
Knowing the four most common business structures is one step but it still makes for a difficult decision as to which one might be right for you.
There is always a need to consider your business’s needs and goals when looking at a business structure and choosing the right structure that will help you achieve those can often be a compromise between competing needs.
You can of course also change your business’s structure in the future if your needs change.
For example, you may start as a sole trader and then decide to register as a company when you want to raise capital from investors, or the business has grown to such a size that you wish to retain profits for growth or investment in expanded Plant & Equipment or greater capacity.
So, if you are not sure what business structure is right for you, it is a very good idea to speak to a business lawyer or accountant. They can help you understand the pros and cons of each business structure and how they can align to your specific business needs and goals.
We highly recommend talking to your Johnsons MME advisor to get more information and to support you through the process of either setting up a business structure, reviewing your existing structure or if you are thinking there may be a need to consider changing the business structure you currently have.
With the right business structure in place, you can set your business up for success!