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Entrepreneurs who want to run their business all on their own are likely looking at a sole trader, or sole proprietorship, legal structure. A sole proprietorship is easy and inexpensive to set up. It’s also arguably the simplest type of business structure, because no one else is involved.
Below are some of the key features of a sole proprietorship (or sole trader) business structure.
A sole proprietorship is an ideal business structure for business owners who want to be able to make all the decisions. However, it goes both ways. Sole traders also take on all accountability in the event of hardship or lawsuits. If the business goes into debt, a sole trader’s assets could be under threat.
It’s also difficult to raise capital, if you’re planning on growing your business, and sole traders can't claim a deduction for drawing money from their business.
Many new business owners start out with this structure, as it is relatively simple to change legal structures if you’re starting from a sole proprietorship. The same cannot be said for switching from another legal structure.
A partnership is a legal structure under which two or more people operate a business, distributing income or losses between themselves. Instead of a single person making all the business decisions and taking on sole responsibility, control over the business is shared among at least two — and sometimes up to 20 — people.
Naturally, that means the risk is typically shared also. A partnership may be an ideal option for business owners who are willing to relinquish some control in exchange for more widespread accountability. Similar to the risk a sole trader faces, if the business goes into debt each partner’s assets may be under threat.
Below are some of the key features of a partnership business structure.
A partnership is not required to have a written partnership agreement in place, however it’s a good idea to prepare one for obvious reasons. A partnership agreement outlines how income and losses are each distributed amongst partners, and helps ensure all partners are on the same page from the outset.
In a sole proprietorship or partnership, the business owners are part of the business. A company, on the other hand, is its own legal entity. This separation means that operating a company comes with less personal risk. A company exists as its own legal entity.
Below are some of the key features of a company business structure.
Whatever money the business makes belongs to the company, instead of going to the business owners. This reduces the liability of shareholders when it comes to debt and lawsuits, but it also increases the amount of startup paperwork and red tape.
One consideration to keep in mind is that a business set up under a company structure is easier to sell or pass to someone else, as it’s set up as its own legal entity.
A trust, like a company, is a legal entity. The difference is that it is established to benefit people outside of the organisation as opposed to bringing in a profit for shareholders.
Below are some of the key features of a trust.
The profits of a trust are divided among beneficiaries, who then pay tax on the money they make.
An association can be incorporated, or unincorporated. When an association is incorporated, it becomes a legal entity in and of itself — protecting its members from legal liabilities. Incorporation is a simple and inexpensive process, making it an ideal way to establish a legal entity through which small, community-based groups can provide a service.
An incorporated association is intended to do good for a community — typically by providing a recreational, cultural or charitable service to people — rather than make a profit for shareholders. All profits are put back into the association’s activities, rather than distributed to those involved in the business.
Below are the key features of an incorporated association.
There are a number of qualifications that must be met before an association can become incorporated. However, the governing legislation differs in each state or territory. Further information regarding this type of business structure can be accessed via the relevant state bodies.
Choosing a legal structure requires business owners to consider how much power they want over the decision-making process, as well as how much accountability and responsibility they are willing to take on.
When structuring a new business, or restructuring an existing business, it’s critical to understand the extent of your personal liability — as well as tax implications. Make sure to schedule a time to meet with your financial and legal advisors to discuss which legal structure best suits your particular circumstances.
Here are some additional resources to help you choose your business structure.
Please note this article is for educational purposes only. It does not provide legal, accounting, or tax advice.