How To Choose Your Business Structure

September 9, 2021

How To Choose Your Business Structure

By URY ZHANG

[HL] Thinking of buying or starting a business? Here’s how to structure things, so your dream doesn’t turn into a nightmare

Starting or buying a business is an exciting time. Often people are bursting with big ideas and keen to roll their sleeves up and jump straight in. However, the early days of your business will have a significant impact in the long run, so it’s essential to make sure the foundations are solid.

You will face many decisions, questions, and challenges you’ve never met before, so we’ve broken down the things you need to consider when deciding on the structure of your business.

Why does the way you structure your business matter?

The structure you choose to build your business upon impacts three key areas:

  • Your tax implications and how much you have to pay
  • Your ability to grow your business by bringing in investors or sharing equity
  • Your level of personal liability should something go wrong

What structure will work for you?

There’s no one-size-fits-all, which is why it’s important to understand your options, your goals as a business and which structure will help you achieve them. There are five main options:

Sole Trader – A sole trader is a person trading as an individual responsible for all aspects of the business. This is the simplest way to start a business and often the cheapest. When it comes to paying tax, you’ll pay tax on your earnings as if it were personal income.

However, as you are trading in your own name, you have direct responsibility for any debts, losses, bankruptcy or liabilities should something go wrong. If you find yourself in a lawsuit, any assets in your name are fair game. Also, growing your business becomes more complex as structuring as a sole trader prevents you from bringing in partners.

Partnership – A partnership structure involves two or more people going into business together and equally sharing the income and liabilities of the business. It’s relatively straightforward and inexpensive to set up and can work well if you have deep level of trust in your partner.

Where things may go wrong is when it comes to each person’s responsibility to repay debts. In a partnership structure, you’re not only liable for your share of the debt but anything owed by the other partners.

Company – A company structure works as a separate legal entity with the same rights as a natural person. Business operations are controlled by the directors and owned by the shareholders. It’s a more complicated structure to set up and comes with higher administrative costs.

However, the benefit of a company structure is that shareholders can limit their personal liability and will not be personally responsible for any business debts or lawsuits that arise. Company directors can, however, be personally liable for the company’s debts and regulatory action can be taken against them where they breach the law.

Discretionary Trust – A discretionary trust structure is where a person (the Trustee) is under obligation to hold property for the benefit of the other persons (the Beneficiaries). The beneficiaries’ entitlements to receive capital and income are not fixed, allowing you to split income across multiple beneficiaries in the most tax-effective way. It also offers various degrees of asset protection.

However, a discretionary trust structure is only recommended if you plan to go into business with people directly related to you.

Unit Trust – Finally, a unit trust is similar to a discretionary trust; however, the beneficiaries have fixed entitlement to capital and incomes. It’s a less regulated structure than a company and provides less flexibility around income splitting and asset protection than a discretionary trust.

Three questions to ask before signing on the dotted line

Now that you have a better understanding of each business structure ask yourself these important questions to decide which is right for you.

  • Are your assets at risk if you set up as a sole trader or partnership? If something goes wrong, anything in your name, including your house, car or savings account, could be taken to cover debts or lawsuits.
  • What are the dangers of putting all your businesses under one entity? Owning and operating your business and assets under one entity could bring down the whole deck of cards if one part of your business fails and leave you unprotected and liable to considerable losses.
  • What’s your end game? Do you plan to sell your business down the line, or will it be inherited? Succession and estate planning need to be factored in from the outset.

Assemble a team who can help you get it right

Whether you’re going it alone or starting a business with a partner or group of people, the team you surround yourself with will make a big difference to your success. And that includes the professionals you enlist to help, such as lawyers, accountants, and financial advisors. Make sure that everyone is working together in harmony and aligned with your goals.

Hopefully, you’re feeling more confident in building a stable foundation for your business. If you’re ready to get going or just need a bit more advice, please reach out for a chat.

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