Buying or starting a business is an exciting and rewarding step to take, and you’ll be bursting with great ideas to make it work.
That enthusiasm is just what you need to make the most of your investment, but there’s also a practical side to consider.
Common Traits Of Successful Businesses
Look at any successful organisation and they will share common traits. These include getting organised, keeping records, being creative – and understanding the risks / rewards, analysing the competition and, the most important of all, choosing the right business structure.
There is no one-size-fits-all business structure. There are many variants, depending on the size of your organisation, the industry you’re in, the legislation you must meet, and so on.
Most organisations fall into one of four business structures, and we’ll take a closer look at those now.
1. SOLE TRADER
As a sole trader you are effectively the business, and liable if anything goes wrong. Whilst you can employ staff to help you run the business, all legal responsibility is yours.
This is the simplest form of business structure, and the cheapest and easiest to set up. It is also the simplest come tax time. You can use your individual Tax File Number to lodge your income tax return, and report all your income in your individual tax return.
You should apply for an ABN, and use that for all your business dealings, and you can register for GST if your annual GST turnover is $75,000 or more.
The advantage of being a sole trader is that you have total control over the business. You retain all profits, you can make decisions quickly, and you can offer a more personal service. And unlike other business structures, your information remains private.
See the business.gov.au website for more information
Establishing a company is more complicated than being a sole trader, and comes with much higher set-up and administrative costs.
A company is a separate legal entity, and must register with the Australian Securities and Investments Commission.
It has limited liability compared to other business structures, but offers less control. Business operations are owned by the shareholders, and controlled by directors.
The biggest advantage of a company structure is that it is a stand-alone entity. That means you are not personally liable for the assets and debts of the business.
A company tax return must be lodged with the ATO, and all earnings belong to the company.
See the Directors page on the ASIC website for more information.
This business structure is a bit like a company, with more than one person (up to 20) or entity owning / running the business together.
A partnership can be a good way of sharing the cost, and the responsibility – and, of course, the earnings.
This type of structure is fairly easy and cheap to set up, and to manage. So long as the partners get on! If you are going into a partnership, do your homework first and ensure the person / people you choose are right for the position.
Whilst you share the responsibilities, costs and earnings, the partnership doesn’t pay income tax. Each partner pays tax on their share of the income. You do, however, have to lodge a partnership tax return every year.
A partnership does bring several benefits. For example, you don’t have to shoulder all the responsibility and cost on your own. In addition, it usually means the business starts in a stronger financial position.
The downside is that you don’t have sole control, and problems could arise if you have a disagreement, or if a partner wishes to leave or sell their share.
For more information see the Partnership pages on the business.gov.au website
A trust is usually quite expensive to set-up and run, and involves much more paperwork. Trustees need to be appointed, and the trustee is legally responsible for operations.
There are different types of trusts in Australia, including discretionary, family, testamentary, unit, spendthrift, and more. Clearly, this can be a complicated and confusing business structure.
For more information see the types of Trust pages on the business.gov.au website.
It is important to choose the business structure that best suits your organisation, your finances, and your needs and goals. It is also worth noting that you can change the business structure as you go along. In fact, as the business grows, you will most likely need to. Your choice of structure is also affected by the type of business – for example, a family business, franchise, home-based business, importer/exporter, and so on.
The first step to take in choosing a business structure after doing some research, will be talking to your accountant and solicitor. They will be able to offer guidance.
To see whether or not you should incorporate your business, we suggest reading the related ATO web page.
For further information about starting a company, you’ll find some great information on this ASIC web page.
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