Business Structures – Pros & Cons

Business Structures – Pros & Cons

Which Business Structure is the right for you?

The costs and risks of each legal structure are quite different.

PROS

1. Sole Trader

  • Easy and low cost to set up
  • Owner has 100 per cent control
  • Less compliance and legal requirements necessary
  • The legal structure is easily changed
  • Owner keeps all the business profits
  • Provides maximum privacy

2. Partnership

  • Set up easy and low cost
  • Fewer legal requirements or outside regulation
  • Partners share risk and responsibility
  • Easier to raise finance with more partners
  • Easy to change legal structure
  • Broader management base

3. Company

  • Financial liability is usually limited to the assets of the company
  • It is easier to raise finance for expansion
  • It is easier for other people to take a stake in the business
  • It has greater credibility with some customers
  • Ownership can be easily transferred
  • The business is not affected by the death or incapacity of an owner

4. Trust

  • Limited liability is possible
  • A trust is more private than a company
  • Greater flexibility as income can be distributed
  • Continuity of the trust can be tricky

CONS

1. Sole Trader

  • Owner has unlimited personal liability so there is no protection for owner’s personal assets
  • The business may fail if the owner becomes sick or incapacitated
  • It can be more difficult to raise finance
  • With only one person, the business has a narrower skill base

2. Partnership

  • Each partner is personally liable for all partnership debt
  • Authority is divided among partners
  • The partners can disagree
  • There are limits on partnership size
  • Ownership transfer more difficult

3. Company

  • Higher annual accountancy fees
  • Must publicly disclose key information thus less privacy
  • Extra regulations and record-keeping
  • Directors duties complex and wages subject to PAYG
  • Decisions can be restricted by company’s constitution
  • Owners cannot offset losses against other income
  • Costly to wind up

4. Trust

  • Costly to set up and run
  •  More compliance and legal requirements
  •  Trust deed has a limited life
  • It can be difficult to raise finance
  • Trustee is subject to Trustee Act
  • Powers are restricted to the trust deed

Before you start your business get advice from you solicitor, accountant or business adviser/mentor/experienced business owner on which business structure suites you best.

Owning a business takes a broad range of skills and personal abilities. As a sole trader, you are the business. But if you feel you don’t have sufficient experience on your own, taking on a partner or having a board of directors advise your company may add to your business success.

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