Choosing a legal structure for your business is one of the most important decisions any new business owner will make. This will have a significant impact on key areas including payment of tax, control over the business, and legal liability.
For this reason, it is a decision that should be made in consultation with experienced business lawyers in Melbourne. I such a way you will obtain expert advice on which legal structure will be most suitable for your business. Especially for the specific and unique requirements of your business.
In Australia the main legal structures for businesses are:
- Sole trader
- Partnership
- Trust
- Company
- Cooperative
The following seven factors differ across these main legal structures. Therefore, they are important to understand when choosing a structure for your business.
1. Control
An important factor to consider when selecting your structure is the level of control you wish to have over your business. For example, if you wish to own and operate the enterprise completely alone then being a sole trader would be the most appropriate structure. Your choice of legal structure will affect what aspects of the business you will control and what aspects you will legally own.
2. Limitation of liability
Your choice of legal structure will have important implications on your potential legal liability. Considering the extent you need to be protected from personal legal liability is important before choosing a business structure. This is because a considerable advantage of a complex structure such as a company is the protection from your personal assets becoming liable from any debts and losses incurred.
3. Cost and complexity of formation and legal structure
The different structures each have differing setup procedures, costs and complexities involved. For example, while a sole trader is simple to set up and requires few reporting requirements, a more complex structure like a trust involves strict reporting requirements and must be set up by a solicitor or an accountant.
For other legal structures about disability claims and benefits, check here.
4. Flexibility and future needs
It is important when considering a legal structure to also reflect on where you envision your business going in the future. For example, the expansion of a trust is subject to legal penalties. So, it is not an appropriate structure to choose if expansion can be a goal in mind for your business.
5. Tax implications
The legal structure of your business will have significant effects on the amount of tax you pay and the kinds of tax that you must pay. For example, a sole trader enjoys tax benefits from being able to claim on a personal tax return and those in a trust do not pay income tax on profits.
6. Ongoing administration
Whilst a sole trader structure has few reporting and administrative requirements, complex legal structures such as a company have strict and difficult record keeping and paperwork requirements. In fact, an important consideration before setting up a complex legal structure is ensuring that you have the time, people, and ability to abide by the strict recordkeeping requirements that are legally enforceable.
7. Continuity of existence
It is important to consider how you see the business coming to a conclusion. If you wish for the business to be terminated when you personally wish for it to end, then becoming a sole trader is the most appropriate option. However, if you wish to secure your family’s financial future, it is more appropriate to select a legal structure that does not come to an end if you are incapacitated.
Choosing an appropriate legal structure is a very important decision to make for your business. It is therefore important to consult with an experienced business lawyer. In such a way you will ensure that your legal structure will suit your business and personal needs.
Author Bio: Laura Costello is in her fourth year of a Bachelor of Law/International Relations at Latrobe University. She is passionate about the law, the power of social media, and the ability to translate her knowledge of both common and complex legal topics to readers across a variety of mediums in a way that is easy to understand.
Most business owners have the goal of building a scalable business with strong brand recognition. Initially, their focus is firmly on product development in order to produce a useful and saleable product or service.In these early stages of development, implementing a robust commercial structure might seem like an unnecessary burden. Get the product right first, then figure out the detail when the business actually makes a sale, starts to expand or grow and operational issues become more necessary to address.Unfortunately, shifting your business structure down the list of priorities can also cause major problems down the track. Once you have started, tax and legal ‘roadblocks’ can make it complex and extremely costly to change your structure.For example if a restructure isn’t implemented carefully, you could find it triggers an unwanted tax liability for the business or its shareholders on the unrealised value of the entity. This could happen at a point in time before the business has actually generated any surplus cash to pay for these liabilities.Avoiding these ‘roadblocks’ makes it important to think ahead and obtain advice early. Establish a structure that is both robust, but flexible enough to supportthe business and its activities now and into the future. The more effort you invest up front the greater the likelihood of positive returns to you, over the life of the business.When deciding on which structure would be most appropriate to operate your business venture, there are many commercial as well as tax issues you need to consider.Here are my ‘top’ issues to consider:
Tax is an important consideration, but it should not be the key driving force for choice of structure.You need to consider how the structure is taxed on its profits, how your personal income and drawings are treated and how any capital gain that you may make on the sale of the business will be treated, in order to maximise your return upon sale.But tax is only one consideration in the mix, along with the other commercial needs and objectives you have for the business as outlined below.
- Commercial acceptance and operations
It’s important to have a structure that is commercially acceptable and easy to deal with. This is not so important if you’re dealing with individual consumers, but if your customers are other businesses or government departments in particular, they can have strong opinions about the type of business structures they will engage with. Most government departments, for example, will only deal with corporate structures. Banks, insurers, landlords and other third parties important to the operation of your business can also treat businesses differently based on their structure.You also need a structure that is scalable and can grow with your business and its changing needs. Once again, this comes back to planning for the future and choosing a structure with flexibility to accommodate different opportunities the business might face as it evolves through various stages of growth and maturity.
- Asset protection – safeguarding business and personal assets.
Many individuals overlook this aspect when establishing their business and run into problems down the line.It’s the stuff of nightmares – how do you adequately protect your assets against creditors and other third parties if something goes wrong?
There is no quick fix. The best way to protect an asset is to have a number of protection mechanisms in place. These may include:
- Having adequate insurance cover;
- Reducing the possibility of being sued;
- Owning assets in protected entities
A common form of asset protection is to ensure that those at risk do not own any assets. In the case of a business, this means the business is carried on in one entity and the business assets are held in another entity. The asset owning entity can rent the assets to the business entity.
- Intellectual property protection
Central to the core of most businesses is some form of valuable intellectual property (IP) that has been developed. In the early stages, this IP will usually be developed in a structure which then becomes the trading entity. The IP could be protected by a patent, or other rights such as a copyright, but also needs to be protected from the trading and operating risks that arise. This is usually achieved by having the IP in a separate structure to the trading entity. The IP entity will then license the use of the IP to the trading entity.Forward planning is also needed when deciding which entity will own IP, as moving IP from one entity to another can create legal problems and where the IP has value, you could also find you crystallise an unwanted tax liability as well.
- Investor-friendly and ready
It’s important to think about the funding needs of the business and your options for obtaining funds.For businesses that intend to raise capital through private equity, the structure needs to be both investor-friendly and investor-ready. Almost all professional investors will only invest in a business with a corporate structure, as it has clearly defined shareholders rights.Another funding option might be government grant programs. In many instances, only companies are eligible to claim or apply for these programs, which can provide substantial amounts of cash to support business activities. The Research & Development Tax incentive is one example.If the structure is unappealing to investors and limits their ability to access government funding, this will affect business opportunities, growth and ultimately the value of the business as a whole.
A successful exit is what most aspiring business owners strive for. Having a structure that provides choice and flexibility as to how you might sell the business is important.In the case of a company structure, you have a choice to sell the shares in the company or the business separate from the structure. Each option has different commercial and tax implications and both are important to your investment in the business, and that point in time when you eventually want to realise and extract some or all of it.