Starting a new business involves making many critical decisions. One of the first choices you’ll face is selecting the right business structure. Here’s what you need to know!

The decision between a sole trader/partnership, trust, or company can significantly impact your business’s success and how you navigate legal, financial, and operational aspects. Let’s explore the pros and cons of each structure to help you make an informed choice.

Sole Trader/Partnership

Pros:

    • Cost-effective and easy to set up.
    • Simplicity – operating as a sole trader or partnership is straightforward regarding administration and compliance.
    • You have full control over the business management and decision-making.

Cons:

    • Unlimited liability – your personal assets are at risk if the business encounters financial difficulties or legal issues.
    • Limited capital – it can be difficult to raise capital, and you are limited to personal funds or loans.
    • Minimal tax benefits – the business profits are taxed at the individual’s marginal tax rate.

Company

A company is a separate legal entity and is considered its own legal person, separate from all its directors and shareholders.

Pros:

    • Limited liability – a company is a separate legal entity and has its own assets, obligations, and rights. Therefore, your personal assets are protected from business debts and obligations.
    • Access to capital – companies can easily raise capital by issuing shares, making it easier for businesses with expansion plans.
    • Tax benefits – a company pays tax at a capped tax rate.

Cons:

    • Setting up a company is difficult and expensive.
    • Complexity – companies face more regulatory requirements and administrative burdens. Compliance with company law, annual reports and shareholder meetings can be time-consuming.
    • Accessing company funds – company funds cannot be used personally without first declaring a dividend or recording wages.

Trust

The most common trust is a discretionary trust, also referred to as a family trust. The trustee has legal responsibility for the trust and has full control over its operation. A trustee can either be an individual or a company.

Pros:

    • Tax benefits – income of the trust can be distributed among family members to take advantage of lower tax rates.
    • Asset protection – assets held in a trust are protected as they are separate from the personal assets of the trustees and beneficiaries.
    • Succession planning – trusts are useful for estate planning by ensuring a smooth transition of assets to future generations.

Cons:

    • Setting up a trust is difficult and expensive, requiring a formal trust deed.
    • Complexity – setting up and maintaining a trust involves more complexity and costs compared to a sole trader or partnership structure.
    • Limited lifespan – a trust cannot exist indefinitely. The maximum lifespan of most trusts is 80 years (as prescribed by law).
    • Borrowing funds – due to the complexities of trust structures, it can be difficult to obtain finance.

Each structure has its advantages and disadvantages, which you should carefully consider. The choice of business structure depends on your specific circumstances, goals, and preferences. If you’d like some advise, or have some questions, call us on 0417 859 700 or email us at rebecca@kaleidoscopeaccounting.com.au.