The business structure you choose can determine how much tax you pay,
what you can do with your profits — even your personal liability if something
goes wrong.
Most business owners choose to operate as a sole trader, partnership, company
or trust. Each structure has pros and cons. There is more involved than
just deciding between a partner or going it alone. Among other things, your
business structure will affect:
- Your set up costs.
- Your ongoing paperwork and administration costs.
- Distribution of profits to partners, family members and others.
- The tax you pay, and your options for tax planning.
- The ease of selling, changing ownership, or continuing the business when
you leave.
- Your personal exposure to debts and other liabilities.
The different business structures and their attributes are listed below:
Option 1: Sole trader
As a sole trader, you are the business. This is the simplest structure to
set up and run. You don’t have to register a business name if you prefer to use
your own.
Simplicity comes at the cost of some inflexibility, including tax planning. And
you’re completely responsible for business liabilities like debts or employee
claims.
Option 2: Partnership
In a partnership, all partners own the business and its assets jointly and
are equally responsible for debts. So even if you only own 10% of the
partnership, you’re personally responsible for 100% of its debts (as are the
other partners).The Partnership Act together with your partnership agreement
governs your rights.
Option 3: Company
A company is a separate legal “person” with a life of its own. That gives
you an extra level of flexibility in managing your business affairs. It also
reduces your personal responsibility for business debts and other
liabilities.
In theory, your exposure is limited to the “paid up capital” of the company.
This is the amount you and other shareholders have paid to own shares in it.
But lawmakers are increasingly “tearing the corporate veil” to make company
directors personally liable to a range of legal actions, while lenders will
often ask you for a personal guarantee.
Option 4: Trust
Typically the most complicated option, a trust is run by its trustee, for
the benefit of the trust’s beneficiaries. The beneficiaries and trust rules are
set out in the “trust deed”.
In a discretionary trust, the trustee has enormous flexibility in
distributing each year’s income among the beneficiaries. So, although the trust
usually pays no tax itself, it can give you significant tax planning
opportunities. And because the trustee is personally liable for the trust’s
debts, it can limit your liability — especially if the trustee is a
company.
