Three business structures for your startup

Partnerships, sole trader or company – what’s the difference? How tied are you to the structure you choose? The early stages of any new business can feel like a frenzy, but it’s worth taking a breath, and considering how your setup will work with your long-term strategy.

To help inform your decision, it’s important to take the time to understand the different ways you can set up your business, factoring in personal circumstances, the size of your business and your plans for growth.

Sole trader

A sole trader structure is when a person is trading as the individual legally responsible for all activities of the business, explains Matthew Payne, Partner at TressCox Lawyers.

“There’s no division between their personal assets and business assets, and they can trade using their own name or they can register a business name and trade under that business name,” he says.

Keep in mind:

• As a sole trader you have full control over the assets and the business
• This structure is a low-cost, easy setup
• The sole trader is taxed as an individual. You have to report your business income in your individual tax return
• Losses from your activities can be used to offset other income
• You’ll be personally liable for all business debts
• Your personal assets are at risk if things go wrong and can be seized to recover a debt.

Partnership

“A partnership is a relationship between people or entities running the business with a common view to generating a profit. Each partner makes some sort of contribution which might be their skill, labour or some property,” says Payne.

Partnerships are common for professional services firms (i.e. lawyers, accountants) and like sole traders, it can be fairly easy and inexpensive to set up, he says.

“For any structure, other than a sole trader, where you’re running a business with other people, we always recommend some form of document be drafted to clarify the relationship and what the rights and obligations of each party are.”

Keep in mind:

• Partners have shared control over the management of their business, subject to any agreement they have among themselves
• While a partnership is easy to establish, it’s important to create a signed partnership agreement to protect yourself
• The partnership doesn’t pay income tax on the income. You and each of your partners pay tax on the share of the net partnership income you each receive. Individually each partner will have to report their own partnership income in their own tax return
• You’re liable for the debts and obligations of the partnership. Therefore, it’s important that you are aware of what your other partners are doing. If they’re presenting themselves as authorised to act on behalf of the partnership then all of the partners become liable for whatever they agree to do.

Company

“A company is a separate legal entity from the people that are involved with it. A company has the same rights as a natural person, which means a company can incur debts, and can sue and be sued,” explains Payne.

A company has members, or shareholders, who are the owners of the company, and the directors who form the board, who run the company on behalf of the members, says Payne.

The main difference with a company is that the liability of the members is limited to what they invest: “You don’t have to put in additional funds if the company doesn’t have sufficient assets to pay its debts.”

Keep in mind:

• Business operations are controlled by directors and owned by the shareholders
• Companies are taxed as separate entities and do their own tax return
• Companies have more complex business structure to start and run
• Shareholders can only take money out of the company by way of dividend, or there may be loans between companies and shareholders
• Money earned by a company is housed within the company, and it has a separate bank account. If the company wishes to retain funds, then it just does so within the company’s bank account.

“Ensure you get advice from a tax adviser, a lawyer and an accountant before transitioning your business so you’re aware of the costs up front,” says Payne.

By Thea Christie

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