Factors to consider when choosing the most appropriate structure in which to operate your business include: – number of owners; size/turnover of the business; number of employees; ability to distribute income; and business risk (ie do you operate in a field where you are likely to be sued).
The most common business structures used are as follows:-
Sole trader – As the name suggests, is appropriate for businesses with one owner/operator. It is the most simple business structure with minimal set-up/maintenance costs and is suitable where the likelihood of legal action against the owner is minimal.
Partnership – Is also a relatively simple business structure and is suitable for businesses in which owners number between 2 and 50. Set-up costs and maintenance costs are also quite low but it does not offer any protection of partners’ personal assets in case of legal action against the business OR with regard to debts of the partnership/business.
Trust – Is a more formal type of business structure which can be used where it is desirable and advantageous, from an income tax point-of-view, to be able to distribute income to beneficiaries (usually family members) of the trust. Naturally, the set-up and on-going costs are higher as trusts have to be “formed” in accordance with the law and also have to comply with both accounting and legal requirements on an on-going basis.
Company – The most formal of the business structures which has the major advantage of separating the assets/liabilities of the business from those of the owners/shareholders. With the business owned and operated by the company (which is a legal entity in its own right) any legal action taken against the business is, generally, limited to the assets of the company – EXCEPT where directors have been found to be negligent. As for trusts, set-up and maintenance costs are higher due to the necessity to comply with accounting and legal requirements.
Each of these structures has its advantages as well as limitations – and very different set-up and maintenance costs. However, getting the correct structure for your business is most important and we can help you get that right. Furthermore, we can then assist in completing the relevant documentation to get your business, partnership, trust or company established within the correct legal framework.