Commercial and Business Structures

Types of business structures when setting up your business

When setting up a business, there are so many decisions that you need to make:

• choosing a business name;
• pricing structure;
• product and service offered;

and the list goes on!

One of the most complicated and difficult of these decisions is to decide what sort of business structure is best for you and your business.

What structures can I use for my business?

The three most basic business structures are:

1. Sole trader
2. Partnership
3. Company

What is limited and unlimited liability?

When discussing different business structures, one of the main points of consideration is the limitation of liability.

If a business has unlimited liability, then the owner is completely and personally liable for the business, including its debts. This means that if an unlimited liability business has a debt (let’s say it’s to a bank), then the bank can use the business owner’s personal assets towards that debt if it is not repaid. Similarly, if an unlimited liability business is sued successfully, then the owner’s personal assets (e.g the family home, car etc) may be used to pay the judgment debt.

In a limited liability business, however, the owner is only personally liable for the business up to the value of their shares.

Let’s consider this scenario

• • A business has a debt of $10,000 but the business does not have any money.
  • In an unlimited liability business, the owner of the business will have to pay that $10,000 even if it means the owner has to sell some of their assets.
  • In a limited liability business, if the owner only owns $500 of shares, it may lose that $500 in its shares, but it will not have to pay the remaining $9,500 towards the debt.

What is a sole trader?

A sole trader business is a single owner running the business under their own name (i.e the business is not a separate legal entity from the owner). Even though a sole trader business is not a separate legal entity from its owner, it can still operate under its own business name.

This business structure provides sole traders with the flexibility to run their business in their own way and is generally quite inexpensive to set up. Generally, sole traders will not be required to share the profits with other parties.

One factor which is important to consider for sole trader businesses is that the owner has unlimited liability for the business, including its debts.

What is a partnership business structure?

A partnership is similar to a sole trader business, except there are two or more people involved as owners.

Like sole trader businesses, a partnership is generally fairly inexpensive to set up, however, it is usually recommended that the partners all enter into a Partnership Agreement with each other. A Partnership Agreement sets out the ‘rules’ and ‘expectations’ for the partnership. If you would like to talk with someone about getting a partnership agreement, give us a call or see more information about commercial contracts here.

For more information about partnership agreements:  1800 001 339

Although it is sometimes possible to limit the liability of some partners, generally all partners will have unlimited liability for the business, including its debts.

What is a company business structure?

Most Australian companies are ‘private companies’ which means that you cannot buy or sell shares in that (private) company on the stock exchange.

Generally, the official name of a private company will have “Pty Ltd” at the end. This stands for ‘Proprietary Limited’ and means that the company is limited by shares. In other words, unlike sole trader and partnership businesses, owners of a business with a company structure have limited liability for the business (including its debts).

One of the reasons many businesses don’t operate as a company is because they are generally expensive to set up and have strict rules which they must comply with.

Generally, the owners of a company are called shareholders and they will enter into a shareholder agreement at the beginning of the company. If you would like to talk with someone about getting a shareholder's agreement in place, give us a call or see more information about commercial contracts here.

For more information about shareholder's agreements:  1800 001 339

Can you change your business structure once you have started?

If there is one thing for sure in business, nothing is for sure. Sometimes, you can decide on a business structure that is absolutely perfect for your business, and then a couple of years down the track, that might not be the case anymore.

Not to worry, IM Lawyers can provide advice around the business structure that might suit you better now and into the future and help to update or upgrade your business structure accordingly.

We’ve worked in small and medium businesses so we understand some of the pressures that you are facing and the factors that you might be weighing up for your business. We can talk through these factors with you to consider the advantages and disadvantages of various business structures to help you find the right fit.

How IM Lawyers can help

At IM Lawyers we have the expertise to assist you to understand and provide you with advice about business structures, to assist you to decide what business structure is right for you. We can then also help with the setup, no matter which business structure you choose.