Before diving into the features of different business structures, it may be worthwhile to first consider the key factors and their ramifications on your business. On the top of my list would be fund raising, control, capability, taxes and asset protection.
1. Fund raising
If you need to obtain outside funding sources, whether from investor or venture capital and bank loans, a company may be a more effective vehicle, with its ability to issue shares and other capital and debt security instruments to secure funding for growth, while sole proprietors can only rely on personal or family resources.
You can retain primary control with both sole proprietorship and a sole-director company. You can negotiate such control in a partnership agreement as well.
A corporation is constructed to have a board of directors that makes the major decisions to guide the company. A single person can control a corporation, especially at its inception, but as it grows, so does the need to operate it as a board-directed entity.
Control or voting power and management discretion may be diluted by the extent of external funding, which usually may have voting rights and management discretion, or minimum performance results attached to the funding arrangements.
Control and management discretion may be diluted if your business requires the capabilities (which in this context broadly encompasses knowledge, skills, experience and vested business network and influence). In return for their collaboration, they may be offered a stake in the business (or shareholdings), a key position, or both.
A sole trader or partnership’s profit is taxed at individual rates in the owner or partners’ hands, which can be up to 49% including medicare levy.
By contrast, company and trust are taxed at 27.5% (for the 2016-17 and 2017-18 year).
Company and trust also provide more opportunities for tax planning with multiple shareholders and profit distribution.
5. Asset Protection
With a sole trader or a partnership, the owner or partners have full responsibility for the business’ liabilities – your personal assets including your home are at risk if things go wrong.
By contrast, company are treated as separate legal entity and provide reduced liability (note that directors are made personally liable if proven to have allowed the company to trade while insolvent or otherwise defraud creditors.)
A trust provides one extra layer protection if it is setup with a corporate trustee. The limitation of a trust is that profits are fully distributed annually, whereas it can be retained in a company.
This can be overcome by setting up a bucket company for the trust to distribute profits to. This structure effectively involves 3 layers of setup and ongoing reporting and tax compliance costs.
Right structure, right time
For all the above considerations, your business is unlikely to stay fixed at the same stage of development, and is more likely to move along a continuum of maturity and complexity, which at different point will require a different structure to operate at optimum level.You may start with a simpler structure and move to more elaborate ones as your business progresses. It may be more practical to operate as a sole trader hot-desking while you are researching the supply chain, developing the product or service model, until you reach income of 88K, the point at which personal tax and company tax equalises.You may want to set up a company at this point to save 11.5% tax (37% vs 39% including medicare) while your business income is between 88K and 180K.You might consider alternate structure before you admit new shareholders, acquire a major asset or another business, or enter into a high risk project, etc.
Start with the end
A word of balance, though. Whilst it may be practical to adopt progressive structures, it still pays to have a clear vision of the ultimate structure your business ultimately requires.For this exercise, start with the end – your vision of the business you set out to build, and the structure that would unleash its fullest potentials. Mark that as the destination for your path of progressive structures.Read a quick run-down of the common business structur
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