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Business Structures

Which business structure is right for you?

Choosing the right business structure to suit the needs of your business or commercial enterprise is extremely important. This decision will assist to determine how much profit you make; how much control you have; how much risk is carried; and growth that your business may achieve. Understanding the differences between various entities can help you achieve your business goals more rapidly.

The following business structures should always be considered:

  • Sole trader;
  • Partnership; and
  • Company.

Sole trader

Perhaps the simplest form of business structure is where an individual trades in their personal capacity as the owner and operator of a business.

The benefits of such arrangement can include:

  • Significant autonomy, independence and control for the business owner;
  • Simple and relatively low cost to set up; and
  • Access to business profits and losses.

The limitations of sole trading can include:

  • Prospective liability and risk, in particular potential exposure of personal and business assets; and
  • Business success often tied centrally to the individual, and therefore risk and reward unable to be shared with other partners.

Partnership

Another common business structure is a partnership. Essentially a partnership comprises two or more individuals or legal entities carrying on a business with a view to common profit. Generally, partners share in profits and losses of the business and are jointly are severally liable for the debts of the partnership.

The benefits of such arrangement can include:

  • Relatively low costs to establish;
  • Risk and reward shared;
  • Raises prospect of different skills and assets being contributed to business by each partner; and
  • Losses can be accessed directly by partners.

The limitations of partnerships can include:

  • Exposure to joint and several liabilities limiting opportunity for asset protection; and
  • Prospective conflict and disagreements in decision making affecting business and stalemates.

Company

Company structures are often utilised with a view to creating a legal entity that has its own personality and standing. This associates the right to own property, operate a business, to sue and conversely, being sued. Generally speaking, a company structure allows the owners, as shareholders, to be separated to a certain degree from the business operations of the entity.

Benefits of utilising a company structure include:

  • Prospective asset protection for shareholders who enjoy limited liability for company debts. It is pertinent to recognise that directors of companies can be liable in certain circumstances; and
  • Flexible structure to introduce new parties to business via transfer of ownership by shares.

The limitations of company structures can include:

  • Costs associated with set-up, ongoing reporting and accounting;
  • Loss of control, with decision making power to the board of directors etc.;
  • Extensive regulatory compliance necessary; and
  • Office holder obligations, risks and liabilities.

Considerations to make when deciding which structure to utilise

Making a decision about which business structure is right for you should be informed by consideration of the nature of your business, the extent to which personal control is important to you, your appetite to share profits and risk and commercial cost factors. Our Business Structures and Development team at Forge Legal welcome the opportunity to discuss with you how we can best achieve your business goals and aspirations as rapidly as possible.