Business Structure 2 – Risk

Exhausted of spending all your time reading endless articles about business requirements, and not really getting what you actually need?

Want to actually understand all the information you require to start and run your business?

Well, you’ve come to the right place!

Welcome to our series of Little Tips where we will cover a range of topics on starting and running your very own business.

The first topic is Business Structure where we will briefly explain the main issues in a simple and readable manner. In each post we will look at each structure from the following points of view:

• Risk
• Profit Distribution
• Taxation
• Opportunity to Raise Capital
• Costs to Run

These tips should only be used as a guideline as there are many implications for each type of business structure which should be discussed with your accountant/lawyer.

Business Structure – Risk

Today we will have a look the different type of structure from the RISK point of view.

Sole trader

You are here on your own. All risks are borne by yourself: if something goes wrong, the creditors will be able to access all your personal assets. Good buy villa on the beach, yacht and speedy car 🙁

Partnership

Now you have a companion or couple of them to share your risks. Good thing – you are liable only for a part of the debt, bad thing – the creditors will be in a better position of access to the personal assets of each of you.

Trust

The creditors can access assets of the trust, and if the trustee is an individual – to his/her assets as well. But if the trustee is a company (it called a corporate trustee) – then the creditors are limited to the extent of the shares issued by the trustee company. Unless the director of trustee company is intentionally doing something wrong, then the director could be in trouble. Beneficiaries of the family trust can’t be threatened by the creditors (except for the situation when each beneficiary is a guarantor of a bank loan – see our further post Business Structure – Rising Capital). Beneficiaries are not contributing any money into the trust as an initial capital (opposite to the shareholders of a company, who is contributing by buying shares), so they are not losing anything.

Company

The company by itself will be carry all risks. Some of the risk to pay the liabilities personally can be exposed to the director, when wrongdoing was intentional, e.g. for unpaid tax or superannuation on behalf of your employee. Liabilities of the shareholders are also limited – a shareholder can only lose the initial cost of shares they paid.

Stay tuned and subscribe for the next topic in our “Little Tips” series. Up next we discuss the risks in each business structure.