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Choosing a business structure.

There are a few ways you can structure your business, each with its own set of pros and cons.

Businesses, organisations, non-profits and charities have certain tax obligations when setting up. They may also have obligations with other government agencies like the Companies Office or Charities Services.

Here is some information on the different options.

Choose a business structure.

Self-employed, partnership or company?

There are different ways to set up your business, with different tax obligations for each. It can be expensive to change your business structure, so it’s important to choose the right one.

Sole trader.

The business is part of your personal finances and you’re responsible for all income and losses.

Sole traders are people who are starting in business or are contracting. Many small business owners, contractors and self-employed people begin as sole traders. It’s the cheapest and easiest option and may appeal to you if you want to make a living by following your passion or to work as a contractor.

Pros:  

  • Setting up is quick and easy.
  • Start-up costs are low – there are no legal or registration fees.
  • You control the business and get all the profits.
  • You can offset losses against other income.

Cons:

  • You’re responsible for paying back all debts – this may put your personal assets at risk.
  • Growing a sole trader business is harder because getting loans or investments can be harder.
  • Selling the business is harder.

Company.

The business is a separate legal entity with one or more owners. Losses are not usually held against the owners and companies can either make a profit or loss at the end of each income year and use losses to reduce income tax in the following years.

Being a separate legal entity affords a company with limited liability, as well as added legal responsibilities.

Pros:

  • Shareholders’ liability is limited to the amount they paid for their shares.
  • The company tax rate is lower than top personal rates.
  • The company has more credibility than a sole trader.
  • Selling the business is easier because it’s a separate entity.
  • The business can grow indefinitely – it’s not tied to one person.
  • Getting funding and investment is easier.

Cons:

  • Companies must comply with more regulations than sole traders and partnerships.
  • Companies can need more investment to grow.
  • Directors need to understand their responsibilities.

Partnership.

You and your business partners share the personal responsibility for income, losses and control of the business.

A partnership is when you and another person or organisation partner together and run a business. This is usually set out in a partnership agreement, and you split the profits and debts accumulated through your commercial dealings.

Pros:

  • Partners can share the load of running a business.
  • Partners share costs.
  • Partners can specialise and focus on strengths.
  • Partners can bring in more capital investment.
  • Partners have someone to discuss the business with.
  • Partners can offset losses against other income. 

Cons:

  • Each partner is liable for all the partnership’s debts — which puts personal assets at risk.
  • Partners may have to pay their partners’ business debts.

Thank you to the Australian Government for this information.

Disclaimer:  EC Credit Control does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.

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