Business Law Blog

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Business Structures
Which business structure is right for you?

Choosing the right business structure to suit the needs of your commercial enterprise is essential.

Understanding the differences between possible entities is an important starting point when considering how to structure your business.

In this article, we briefly discuss the central traits of a number of commonly utilised business structures along with some of their prospective advantages and downsides. The structures considered include:

  • Sole trader – Individual trading as;
  • Partnership; and
  • Company.
Sole trader – individual trading as

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 profits and losses.

The limitations of sole trading may include:

  • Prospective liability, in particular the 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; and
Partnership

Another couple business structure is 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 legal liability in particular joint and several liability for partnership can be a particular downside limiting opportunity for asset protection; and
  • Prospective conflict in decisions effecting business and stalemates can be a prospective downside.
Company

Company structures are often utilised with a view to creating an entity that has its own legal personality and standing, and associates right to own property, operate a business and sue and being sued in its own right.

In essence, company structures can allow 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 can be a positive for shareholders who are not/ enjoy limited liability for company debts, recognising however 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 board of directors etc.;
  • Extensive regulatory compliance necessary; and
  • Office holder obligations, risks and liabilities.

Considerations to make when deciding which structure to utilise

Deciding which business structure is right for you should be informed by considering are range of matters including but not limited to 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 considerations.

The pros and cons of a prospective business structure should inform your consideration of such issues with a view to identifying which structure best suits your needs and broader requirements.