Whenever someone is starting a new business, one of the most common questions that they will ask their commercial lawyer is what legal business structure they should use.
According to Commercial Lawyers Perth, the choice is extremely important as it has implications for many aspects of the business such as tax liabilities, the costs of running the business, and legal protection of the business’s assets.
In Australia, there are four main legal business structures that can be used, and they are sole trader, a partnership, a company, and a trust. Read on, and we will explain in more detail what each of them is, and the ease, or otherwise, of setting them up.
A sole trader is the simplest structure and they are extremely easy to set up. If you operate as a sole trader you are in full legal control of the business and whilst that has some advantages, there are also some not so advantageous aspects.
The main one is that you are liable as an individual for all the business’s debts and tax payments. If necessary, your own personal assets can be used to funds and pay these.
Otherwise, you can file your tax returns under your own tax number, the reporting requirements are relatively simple, and you do not necessarily have to open a separate business bank account, although the general consensus is it is advisable to do so.
Next, we have a partnership, which as the name suggests means setting up a business with one, or more other people. There are three types of business partnerships and the simplest is a general partnership where each partner is equally responsible for managing the business and the liabilities are shared equally too.
A limited partnership is where, instead of the liability being unlimited, an individual partner’s liability is limited to the amount that they have invested in the business. Finally, there is an incorporated limited partnership, which limits liabilities except for at least one individual partner who must have unlimited liability for the business’s debt.
The third option is to create a company, which becomes a legal entity which completely distinct from anyone who runs the business. In effect, the business has a separate identity from any of the owners, and it is subject to the same legal rights as any individual. Accordingly, a company can sue, and be sued.
The owners of a company are not liable for paying any debts or taxes, although they must ensure that all accounting is done in accordance with the applicable legislation, and taxes are paid from company profits.
There are obviously more costs, tax obligations and administrative paperwork required to create a company than a sole trader for example. This is why many new sole trader businesses wait until they are large enough to justify switching the legal status to a company.
Finally, we have trusts where an individual is given legal obligations and responsibilities to operate a trust on behalf of others, who are known as the beneficiaries of the trust. The person or persons operating the trust are known as trustees, and it should be noted that a company can act as a trustee as well.
The administration to set up a trust is significant, as are the costs. For example, a document known as a formal trust deed must be created to indicate how the trust in question operates. There are also annual administrative obligations which the trustees must adhere to.