Choosing the correct legal structure for your business or investments has important cost, tax and asset protection consequences. There are four common business structures that are used by SMEs in Australia: Sole Traders, Partnerships, Companies and Trusts.
- A Sole Trader is where an individual runs the business in their personal name. They own and control the business and the debts of the business will affect their personal solvency. There is no legal separation between the individual and the business.
- A Partnership is a group of two or more people who carry on a business together and distribute income from the business according to a partnership agreement. The partners own the business together and the partners may be both liable for the debts of the partnership.
- A Company is a separate legal entity. It is owned by the shareholders and managed by the directors. A company can provide some level of protection for personal assets, but there are still a wide range of circumstances in which directors can be personally liable. Because a company can issue shares to different shareholders, it is an ideal entity for carrying on a business with multiple owners and to attract investment.
- A Trust is a special set of legal obligations in which a trustee owns the trust assets for the benefit of the trust’s beneficiaries. The trustee may be a company or an individual, and there may be more than one trustee. Sometimes the beneficiaries will have fixed interests - like shares in a company - other times the beneficiaries may have no definite entitlement at all. The asset protection, costs and taxation outcomes depend on the type of trust and the terms of the deed establishing the trust.
It is not uncommon for some businesses to require a combination of legal structures.
Sometimes, your business will outgrow its original structure - a structure that was appropriate in the early stages of business may no longer suitable. When that happens there may be options to restructure.