“No business can succeed in any great degree without being properly organised.” – J.C. Penny
One of the most important decisions you’ll make when starting your business is choosing its structure. This decision is based on the size and type of your business, your circumstances, and how much you plan to grow and expand in the first three years and the future. You’ll also need to think about the accountability of individuals who are in charge of running the business. From there, you’ll need to consider asset protection, tax liabilities, and even ongoing costs and the volume of required paperwork.
There are four main types of organisational structures in Australia that are commonly used by small businesses, which are:
- Sole trader
The other types of business structures are co-operative, joint venture, and incorporated association, but they are much less frequently used. If you’re looking to start a business in Australia, you’ll need to understand the types of structures that exist before you choose your direction.
Types of business structures in Australia
This is the most common type of structure for those just starting their business. Also referred to as a “no business structure”, the individual trades in their name and signs all documents in their name. This means the individual takes full responsibility for their actions and has zero protection from outsiders. There are several taxation detriments that a person should be aware of – these are best discussed with a qualified accountant.
This type of business structure is where the ‘partners’ bear equal responsibility for any issues that may occur with the company. This relationship is built on trust, open communication and mutual respect, as the partners must agree to have different responsibilities and obligations, right down to the decisions being made. Some difficulties with a partnership can arise because the decisions of one partner can effect the entire business – for example, an errant partner signing a document in the name of the business that was not anticipated by the other partner.
A trading company can be created to own the business and manage its affairs. In this case, the individual director is an employee of the company and can earn a salary just like any other employee. Company profits are paid to shareholders, who may also be the director or another member of their family. A significant advantage of this structure is that that the personal assets of the directors or shareholders are not affected should the company go into receivership.
This business structure includes four divisions:
1. Discretionary trust
The trust manages the business and distributes profit to those nominated potential beneficiaries described in the trust deed. These beneficiaries are usually family members or other legal entities owned and controlled by the family members. There are two major advantages to this business structure: there’s a greater flexibility to pay profits to third parties, and the shareholder’s assets are safe should the trust get liquidated.
2. Unit trust
This is where several individuals hold units in a trust to manage the business. These unit holders are paid from the profits of the trust in proportion to the units they own. One of the biggest advantages of this business structure is that the unit holders’ assets are safe should the trust get liquidated.
3. Partnership of trusts
This is similar to the unit trust, but it has the same concerns as a partnership agreement. However, each partnership in the business has the protection that trading as a corporation or trust can provide.
4. Hybrid trust
As the name suggests, this is an amalgamation of the discretionary trust and the unit trust. This structure is only chosen after close consultation with the client’s accountant.
How can I decide which business structure is right for me?
Each business and situation is unique, and all structures have benefits and faults. Don’t decide without the expert advice from Phillip Gallo and Sebastian Hong at Rose Lawyers. Together, they have accumulated many years of experience in providing sound advice to many business owners in Australia. If appropriate, they will discuss your concerns with accountants and financial advisors to make a decision.
Phillip and Sebastian both understand the problems and hardships that a new business will meet, and will try to give encouragement and timely warnings if and when the situation warrants.