'It's The Law' – Choose the ‘right’ business structure

We might hear the terms ‘sole trader’, ‘company’, ‘partnership’ or ‘trust’ thrown around, but what do they mean and how do you choose the right business structure when starting your own business?

Business structure influences how a business operates – from decision-making and how profits can be used to tax and legal obligations. 

Each has its advantages and disadvantages that need to be considered against your individual situation. 

One of the simplest structures is that of sole trader or sole proprietor. It suits people who want to own and run their own business, with low set-up fees, the ability to hire staff and receive some tax benefits.

Crucially, if a person operating as a sole trader is sued, their personal assets, such as their home, might be at risk.

A company structure establishes a separate legal entity.

Companies can vary in size and purpose, from an independent contractor setting up a one-person company with a sole director and member, through to listed public companies, such as the Commonwealth Bank of Australia, where other people can buy shares to invest.

A company structure is a more expensive structure to register and can be more complicated to run. However, if the company is sued, in most circumstances, only the assets of the company are at risk and not the director’s personal assets.

Partnership structures are sometimes used when between two and 20 people go into business together.

Similar to the sole-trader structure, partnership liability is not limited to business assets so partners’ personal assets could be at risk.

If deciding to go with this structure, you will need to discuss with your business partners arrangements around the liability of the business’s debts and obligations. The agreement should be recorded in a partnership agreement. 

Trust structures are another option. A discretionary trust can provide benefits like flexibility in sharing profits among family members and capital-gains tax discounts.

A unit trust, while less flexible, can provide certainty to multiple proprietors who are satisfied with fixed entitlements to capital and income. 

Trusts’ administration is more complex. Generally, a company should be used to act as trustee of a trust rather than individuals personally to protect the trustee should they be sued in relation to the actions relating to the trust. 

As people’s individual circumstances are different, you should seek advice from your accountant and solicitor on which structure best suits your business. 

• Patrick Smith is the principal of O’Brien and Smith Lawyers. This article is intended to be used as a guide only. It is not, and is not intended to be, advice on any specific matter. Neither Patrick nor O’Brien and Smith Lawyers accept responsibility for any acts or omissions resulting from reliance upon the content of this article. Before acting on the basis of any material in this article, we recommend that you consult your lawyer.