Business Structure 1 – Who is Who and What is What

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 – Introduction

So, you’ve got a great idea, and feel like once it comes to life, it will bring you lots of money. You’re ready to start your own business. How exciting!!! And the first question is how should you structure your business?

The four main structure types for a small business are:

• Sole trader
• Partnership
• Company
• Trust (family/discretionary or unit)

(As the intention is to make a profit, we will not be discussing non-for-profit formations)

Sole Trader

It is just you – as simple as it sounds. All you need to do to become a Sole Trader is to register for an ABN.

Partnership

You, as an individual, can be in a partnership with another individual(s), company(es) or trust(s). Or, you can set up a company or trust and become a partner with other individual(s), company(es) and/or trust(s). A partnership needs its own ABN and TFN.

Trust

The more popular type of trust is a family (discretionary) trust. Any family trust has the following parties:

• settlor – a person (relative, friend or accountant/lawyer) who is contributes an initial amount of money (settlement sum) to the trust, usually $1 or $10. The settlor doesn’t carry any risks, doesn’t receive any distribution or make any business decisions.
• appointor – a person(s) who has the ultimate power to change the trustee(s). This same person can also be a beneficiary. But the appointor on its’ own capacity doesn’t carry any risks, doesn’t receive any distribution or make any business decisions.
• trustee(s) (individual or company) – who run the day-to-day business/makes decisions. This role is like the director/management of a company
• beneficiaries – who receive the profit. They can be related individual(s), company(es), trust(s) or partnership(s). Similar to the shareholders of a company, but they do not contribute any capital, unlike the shareholders of a company.

A Trust needs its own ABN and TFN.

Company

As we are just starting, we will assume that we are creating a simple private company, which has Pty Ltd at the end of its name.

Any company has the following parties:

• director – the person (must be an individual over 18 y.o., not a bankrupt, not a criminal and so on) who runs/manages the company and makes everyday decisions.
• public officer is a company’s representative to the ATO and is responsible for the company’s obligations
• secretary – required for public companies only
• shareholder(s) – the owner(s) of the business, who will receive all the profit from the company

A Company needs its own ABN and TFN.

If you are confident that your business will go globally, and the shares will be traded on the Stock Exchange in the future, you may consider creating a Public Company from the very start. This is more complex, lots of regulations and approximately 10 times more expensive in accounting/secretarial fees than a private company. We highly advise you to discuss this option with your accountant and lawyer prior to implementing into life.

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