Choosing
the Right Business Structure
 Which
Business Structure Should You Choose?
Before
throwing yourself enthusiastically into that new business
venture, stop for a moment! Give serious thought to the
business structure which best suits your particular needs.
There are a number of different business structures to
choose from. All have benefits, but they can also have
serious disadvantages. Deciding what business structure
to adopt can be difficult. Factors such as The New Tax
System, personal financial liabilities and establishment
costs must be carefully considered. That's why it is important
to consult with your Perry Ure accountant before making
that decision. As a general rule the more complex the
business structure, the more expensive it is to establish.
The
most common business structures are: Sole Trader; Partnership;
Proprietary Limited Company.
Sole Trader
If
you conduct your business alone, without a partner, then
you are classified as a sole trader. This definition applies
whether or not you have employees working for your.
Advantages:
-
You
are your own boss and are responsible for all decisions.
-
All
profits belong to you.
-
It's
an inexpensive business structure to establish and maintain,
with the least reporting to Government.
-
Subject
to satisfying certain tests, losses can be offset against
any other income or future earnings.
-
You
alone have responsibility for the business. Holidays
become a luxury you may not be able to afford simply
because nobody else has the expertise to run your business
efficiently in your absence.
-
You
are personally liable for all business debts, which
means your assets (including your home) may be at risk.
-
You
continue to pay tax at the personal rate.
Partnerships
The
establishment of a partnership can overcome some of the
difficulties associated with being a sole trader.
A
partnership enables a group of people to contribute their
time, talents and money towards the business. In return
they share the responsibilities and profits. In the absence
of a formal partnership agreement, the law will assume
that each partner has an equal share in the business.
A
written partnership agreement makes a lot of sense. Such
an agreement sets out the special conditions applying
to the partnership. For example, one partner may be contributing
more money or time. For this reason they may have a greater
equity in the business. A formal partnership agreement
will clearly spell out the conditions and diminish the
likelihood of disputes.
Before
entering a partnership, you should remember that many
people who have been close friends for years have found
it impossible to work together as business partners.
Advantages:
-
Taxation
obligations may be minimised, particularly where members
of the same family are included in the partnership.
But the Taxation Office requires that all partners have
real and effective control over partnership assets and
liabilities.
-
Responsibility
for running the business is shared.
-
Ability
to raise finance for the business is enhanced.
-
Liability
is unlimited. If a partner absconds or dies, the other
partners are left with the liabilities.
-
If
the partnership is dissolved or altered, difficulties
may be experienced in obtaining an acceptable valuation
or in raising capital to purchase a retiring partner's
share.
Limited Partnership
The
New South Wales Partnership Act makes provision for a
limited liability partnership structure whereby the liability
of a partner contributing capital can be limited to the
amount of financial contribution, provided that person
does not take part in the management of the business.
The
advantage of the limited liability partnership is that
it allows an investor to invest in a partnership without
being liable beyond the extent of his/her financial investment,
provided certain conditions are met.
Proprietary Limited Company
A
private company is a comparatively complex business structure.
For this reason it should not be the automatic first choice
for the average new business.
The
Corporations Law was amended late in 1995 by the First
Corporate Law Simplification Act. The effect of the amendments
is to substantially ease the regulatory burden applying
to small business. Under the amended legislation, proprietary
companies may have only one director and only one member.
When
you form a company, you become both an employee and director
of the company.
Advantages:
-
The
liabilities of the shareholders are limited to the share
capital they have subscribed and any debts they may
have personally guaranteed.
-
It
is easier to spread ownership of the company.
-
The
company is a separate legal entity and need not be wound
up in the event of death of the directors or shareholders.
-
Under
the imputation system of company taxation, company tax
gives rise to tax credits, which allows the company
to pass on tax benefits when paying franked dividends
to shareholders.
-
Raising
money to put into the business in return for shares
is an option.
-
Establishment
costs are high, as are administrative costs associated
with compliance with the Corporations Law.
-
Lenders
will often seek personal guarantees from directors before
making a loan to the company.
-
Losses
cannot be offset against other income of the owners.
-
Directors
have serious and substantial obligations under company
law.
Other Business Structures
In
some circumstances, small businesses may find that the
co-operative structure suits their special needs.
Again,
your special requirements may call for the establishment
of a trading trust. However, a trust arrangement generally
has little application to the average small business.
Seek professional advice on this matter.
Registration of a Business Name
Under
the Business Names Act (1962) every business name must
be registered, except where the name is simply that of
the owners.
If
you alter your name, add anything to it or use a different
name, then it must be registered. Some examples - "John
Brown trading as Honest John Autos" or "Fastrack
Pty Ltd trading as Tracker Enterprises". Business
names are registered by the Business Names Registration
Centre, phone (02) 9286 0007, and cost $114 for a three
year period.
There
are certain names that will not be registered. Generally
a name that is already registered cannot be adopted by
another organisation. Additionally, names that are misleading
or offensive will not be registered.
The
staff at Perry Ure can assist you in deciding upon an
appropriate Business Structure for you. Contact us on
02 4926 4522 or email mail@perryure.com.au
The above information was brought to you by Perry Ure
and NSW Department of State & Regional Development.
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