Why You Need the Right Business Structure – Yes, It Matters.

Choosing the right business structure when you’re just starting out can feel stressful – you want to make sure you’re choosing the right one, right?

You might do some online research. Talk to some business friends. You might approach it lightly, like, are you running solo? That seems easy, enough. Or, you might approach it like, can you really be bothered with all the rules and costs of running a company? #toohardbasket – let’s make it a partnership instead.

You might fall into the trap of thinking business structure only affects your business. Not true. The right business structure takes your entire life into consideration.

Here’s a simple overview of the four common types of business structure in Australia and how they might affect you personally:

Sole traders

Lone Cowboys. Sort of.

Operating as a sole trader means what is says – you are the sole operator of the business. You make all the decisions, set all the rules, run the whole damn show (note: you can still employ people to help you).

Sole trader structures are simple to set up and relatively inexpensive. The downside is that you’re personally liable for the business, including debts, losses, and legal action. In other words, if one of your customers doesn’t pay you, and you then can’t afford to pay your suppliers, then your creditors (maybe the bank or your suppliers) can come after your home.

This structure suits freelancers, side hustlers, and consultants/contractors working for themselves (provided you have minimal assets and low-risk business operations. If not – talk to an accountant).

Partnership

Partnership structures are kind-of-like a sole trader structure, except, with partners.

They are suitable when you’re jointly sharing control of a business, and can include up to 20 ‘partners’. Partnerships are also relatively simple and inexpensive to set up, but there are some additional requirements regarding your TFN and tax lodgement.

As with Sole Trader structures, you’re each personally liable under a Partnership, too.

Company

A Company structure makes your business a legal entity, separate from your shareholders (including you).

Although a Company is more expensive to set up and run, the benefit is it limits your liability for debts, losses, and legal issues. Which means your house, property, super, lifestyle – remain safely off limits.

As it’s a more complex structure to set up and there’s increased reporting requirements, you’ll need to partner with a savvy accountant to ensure you stay on top of your compliance.

Trusts

At Cinch – aah, we love our Trusts.

A Trust is an entity that controls property or income for the benefit of others.

If you have a business, children or dependents, a property, and/or investments, setting up a Trust could be a solid strategy to safeguard your assets from business liabilities. Trusts can also be the most tax effective structure – there is more flexibility with strategies you can implement with trusts. When compared to a company, it is also easier in many instances to get the income and assets out of a trust and to you personally.

Trusts may be expensive to set up and operate – so we suggest you connect with a great accountant to see if it’s the best structure for your situation.

Choosing the Right Business Structure

There you have it! The four most common business structures in Australia.

There are pros and cons for each depending on your situation and needs, so, it’s well worth getting your head around each before you randomly pick the ‘most convenient’ or cheapest one.

Ensuring your business has the right structure strategy in place means you won’t find yourself giving away half your profits to the tax man, or your car, house, and super to cover bad debts. There’s no need to carry that liability! Not when you’ve worked so hard to get here.

The good news is you’re not locked into the same business structure for the rest of your business’ life! Circumstances change, dreams change, and business structures change, too. Simples.

Sit down with your accountant before you begin to learn what’s best for you, your business, and your family.