Optimizing Your Business Structure from the Outset for Long-Term Success
When you start a new business you want to hit the ground running and start making money. Because of this, a lot of new startups don’t put enough thought into how they are going to structure their new venture. This can potentially cause issues further down the line when you want to change things or you potentially want to sell.
What are the different structures?
The main structures that small businesses think about when starting a new venture are, Sole Trader, Partnership, or Pty Ltd company. Each can have benefits for the new business (some less than others) and some could have a downside.
Sole Trader
Most small businesses will start as sole traders. You come up with an idea, you build a website for it and you start selling it. You generally don’t think about corporate stuff. As a sole trader, there is no separation of liability between you and the business. Anyone who has any claim against the business would have a claim against you.
As a sole trader, you would not have to prepare a separate tax return for your business as it would be included in your tax return. As a sole trader, you can still carry forward tax losses however it is not as straightforward to do as when you have a company structure.
Partnership
If you are starting a business with a friend or some friends then it is quite common for people to opt for a partnership structure. Again, with a partnership you and your partners are personally responsible for the actions of your business. Also, with a partnership structure, you would be responsible for the actions of your other partners. Before you opt for this structure make sure that you are going into business with people that you trust implicitly.
When you set up a partnership you should set up a partnership agreement. This agreement sets out what the partners can and can’t do and who is responsible for what. It is a good idea to get a lawyer involved at this stage. With a partnership you have a separate partnership tax return however you do not pay tax from the partnership itself. Any income that the partnership generates is divided amongst the individual partners who then pay tax on that income in their tax return.
Proprietary Limited Company
There are some different company structures that you can opt for however, most small businesses will establish a Pty Ltd company. Setting up a Pty Ltd company is easy, you can either set it up yourself through ASIC or you can purchase a shelf company through a variety of vendors. A shelf company will usually just set you back a few hundred dollars and generally comes with a binder and all of your official documentation.
When you set up a company structure you separate the liability from you to the company. Each shareholder is liable to the extent of the investment that they have put into the company. Given that the company is a separate legal entity it will need to lodge its tax return and keep its accounting records.
If you are thinking about setting up a new business then we would strongly recommend that you prioritise success by engaging with an accountant or lawyer before taking the first steps. Early consultations pave the way for meticulous planning, offering insights that make the initial phase more seamless and set the foundation for long-term ease of operations. Establishing a solid framework in the early days is key to navigating challenges and achieving sustained success in your entrepreneurial endeavours.
