Right Structure for a startup business

When starting a business, one of the things to consider is the type of business structure you should use to start with your business operation. 

Listed here are the business structures that are mostly used to operate a business.

Sole Proprietorship

A business run by a sole trader is a low-cost option because there might not be a need to rent an office space or hire employees; you can also opt to hire employees or rent a workspace if needed. 

Here are some simple steps to follow in order to start a business as a sole trader: 

1. Register a business name and obtain an Australian Business Number (ABN) online; 
2. Determine whether you need to register for Goods & Services Tax (GST) based on the type of business you’ll be running and how much your expected income is; and 
3. Register for GST if needed. 

The major disadvantage of being a sole trader is being personally accountable for the debt and liabilities incurred by the business. Furthermore, there is the difficulty of raising capital from investors since there’s no way to sell shares and business ownership cannot be split to achieve this. This is something that a partnership or company structure can offer. 

Partnership

In a partnership, you can split the business ownership between partners, and you can raise capital by having more people contribute their personal assets. However, the disadvantage of forming a partnership is the same as that of being a sole trader: all the partners are liable for the debts and liabilities of the business.

Company

Starting a company might be a bit complicated because of its structure and because the cost of setup and operation is higher than for a sole trader. However, there are certain advantages to it that are not available to sole traders and partnerships, like: 

1. A company is a separate legal entity from its shareholders – this limits the liabilities of its directors to the shares they have and means they won’t have the burden of being solely responsible for all the debts and obligations of the business. 
2. Easy transfer of ownership – As a company, you can sell shares to raise capital for your business’s development. 
3. Taxation rates can be more favorable for a sole trader, since you will be filing your business income as an individual and therefore will be taxed as such. So if your taxable income is more than $180,000, then the applicable tax rate is 45%. Meanwhile, the company tax rate for a base rate entity is at 25%, while that of a non-base rate company is at 30%. 
4. Tax incentives, business concessions, and government grants/programs – The government gives more tax benefits to companies than individuals. These benefits help the business grow as there will be more funds available to improve certain areas of the business. 

What should you choose?

In order to know your current financial position, assess your business as a whole. These are some questions you can try to answer to help you decide which type of business structure to set up: 

1. Are you planning to expand your business? 
2. Do you need to raise your capital for expansion? 
3. Is your personal taxable income above $180,000? 
4. Are the potential investors trustworthy? 

If your answers to the questions above are all yes, then it might be a good time to consult with your accountant or financial advisers about setting up the most appropriate business structure for you.

For a business consultation, you can book an appointment with us!