Which Business Structure is the right for you?
The costs and risks of each legal structure are quite different.
Business Structures – The 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
Business Structures – The 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.
