If you’ve decided to launch a new business, congratulations! It’s a big step and there are numerous decisions to be made. One of the most important of these is choosing which business structure to trade under — it’s a key first decision and not one that should be taken lightly. Here’s why.
Your business structure defines your tax and legal requirements and, as a result, can affect the way you run your business. Depending on the structure you choose, it can determine:
While there are a number of different business structures out there, these are the four most widely used structures in Australia:
The Australian Securities & Investments Commission (ASIC) website provides a helpful overview of the different types of business structures.
The right structure for your business will depend on the size and type of the business you run, your personal and professional circumstances, and the sort of growth you expect your business to achieve. As a result, it’s best to seek expert advice from an accountant or legal representative before finalising your decision.
CEO and practice manager of Melbourne’s Bluebird Accounting, CPA Liz Moore helps new business owners to choose the right structure to trade under.
If you’re just starting out, a sole trader structure can be a really good, low cost and effective way to invoice clients and start trading, Liz says. On the other hand, a trust structure provides discretionary trading, the option to have beneficiaries and a corporate trustee, who would be the controller of the trust, she says.
Another key consideration for business owners is asset protection, Liz says. “When a client comes to me, I’ll strongly recommend that if they do have personal assets, they should put a layer of protection between themselves and the business, perhaps by setting up a company.”
When deciding on the best structure, start by considering your risk profile and the type of product or service you will be providing.
“For example, if your business is a children’s clothing brand, you’ve got to make sure that it’s not flammable, and that all the appropriate risk warnings are in place,” Liz says.
“You’ve got to consider how you’re protecting yourself, and what you would need to protect if your entity was held liable for something that went wrong with your product or service that was out of your control. This means ensuring you have the appropriate insurance cover in place. If you haven’t thought about those things when starting out, then you should,” she advises.
“If you’ve got a mortgage and assets, investments or children, you should consider what you need to put in place to protect yourself. It’s important to determine who your market is and what you can control within that market, as well as considering how you can mitigate your risks. Because there are always risks when you’re in business.”
The good news is that you’re not stuck trading under the same structure for the rest of your days. You’re allowed to change your business structure as your circumstances change, which could be useful as your business grows or pivots in a new direction.
Typically, business owners change structure to reorganise the business’s governance. Usually this decision is made if you or your accountant identify a structure that will allow you to be more profitable, that will improve your processes, or that will be better suited to your business’s needs.
It’s also common to change the structure when a business grows — for example, you may start as a sole trader but then decide to take on a partner to share the load.
Understanding the reasons why you’re switching structures and identifying the pros and cons of the change is important, as the new structure can have different implications for your business’s legal and tax obligations, as well as your personal and professional liability.
Whether you’re deciding on a structure for a new business or are changing your existing structure, it’s always wise to take the time to speak to your accountant or legal adviser before you make the final call. Your structure will play a key role in the running of your business, and it’s important to get the right approach for your needs.