Perry Ure Pty Ltd | Accountants | Newcastle

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.

Disadvantages:

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.

Disadvantages:

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.

Disadvantages:

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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