The information provided below is general in nature and should not be relied upon legal advice. You should call 03 5445 1000 and speak to a lawyer at OFRM about your particular circumstances.

Choosing a business structure

Choosing a business structure

Many people that start a business often speak to their accountant about the best structure to enter into. It is not until a business is further down the track that owners seek legal advice on the same question. In fact, it is usually done as an auxiliary issue with another legal matter they have brought to us.

However, your legal business structure is an incredibly important consideration for your business and should be given serious and careful thought from the outset. The structure you select needs to meet your current needs and be capable of evolving as your business grows. Each change can have legal implications that need to be taken into account.

There are four main types of business structure.

  1. Sole Trader
  2. Partnership
  3. Trust
  4. Company

Sole traders

Sole Traders are the simplest and easiest structure to establish. They have very few reporting obligations and do not require any specialist documentation to be provided to ASIC during their operation on a year- to-year to basis. However, as a sole trader your legal liability is personal. This means that if there is ever an issue you could potentially lose some or all of your personal assets including your home, cars and other personal property.

Partnerships

The second kind of structure is a partnership. This is where you have one, two or sometimes more people engaged in a business together. Similarly to sole traders the structure is relatively easy with the only documentation really used being a partnership agreement to establish the relationship and as with sole traders no significant reporting obligations to ASIC on a year to year basis. A good partnership agreement will outline how decisions are made, profits distributed and what steps to take in a dispute, including how to dissolve the partnership. With a partnership, you again risk personal legal liability.

What makes this business structure even more difficult is that you are also responsible to acts committed by other partners.

Effectively this means that you will be held responsible your partner’s behaviour or actions.

Trusts

The third type of business structure is a trust. Trusts are a separate legal structure. Legal liability for acts taken by the trust are generally speaking limited to the Trust and not you personally. However, trust structures are more cumbersome, more expensive to establish and have particular intricate issues with regard to ownership of property, decision making and succession planning.

Companies

The fourth structure is a company. A company is a separate legal entity therefore legal liability in most circumstances is limited to the Company and not you personally.

Again this is a more expensive structure to establish, has significant reporting obligations on a yearly basis to ASIC and for owners there is less control as while you may be a shareholder or a director you do not actually own the assets of the company. There are also significant directors’ obligations to consider.

Making the choice

As the complexity of your needs increases so does the complexity of the structure you need to support you. Whilst initially more expensive, the latter options, when set up correctly provide the protection that you need.

It is important that prior to commencing a business that you have not only spoken to your accountant about the taxation and other financial issues related to any business structure but that you have also sought advice from a legal practitioner in regard to the best structure for you. To speak to one of our lawyers with experience in this area call 03 5445 1000.