How to Choose the Best Legal Structure for Your Business

Businesses are built with a lot of aspirations and determination by entrepreneurs to bring about change or get noticed. However, before giving wings to their dreams, they need to understand the legal implications of the establishment type they want. Australian businesses must comply with legal regulations to become eligible to operate in their chosen city or suburb. They have to define their legal identity to become a part of the commercial sector.

The legal structure of the business outlines its legal obligations that must be adhered to while performing the operations. It also lays down the restrictions related to the business type and the rights of the entity. Thus, new entrepreneurs who plan to buy a Sydney business for sale must pay attention to the type of entity they want to establish. Here are a few tips to help you choose the best legal structure for your business. These will help you make the right choice.

1. Different Types of Legal Business Structures

A commercial entity can adopt four types of legal business structures. These include:

A Sole Trader Business Structure

New entrepreneurs can start their businesses as sole traders because it is easy to establish and operate. The sole trader business structure is run by an individual who is legally accountable for the debts and losses incurred by the entity. The individual has complete control over the decisions and operations and can file tax returns using the individual tax file number. They can hire employees and have to get the Australian Business Number (ABN). They have to register the business name only if it differs from their name.

A Partnership Business Structure

A partnership is owned by two or more individuals who are equally responsible for the losses and share the profits. It can be easily set up like a sole trader business structure and is controlled by the partners. It can be dissolved quickly, and each partner must acquire the ABN to form the partnership. This structure can be of two types – general and limited. In a general partnership, all partners are equally responsible for managing the operations and have unlimited liability for debts. In a limited partnership, one or two partners have limited liability for debts, whereas others have unlimited liability. The liability limit is decided by the investment made by the partner in the business.

A Company Business Structure

A company is set up as a separate legal entity, wherein the owner is not liable for the debts and obligations of the business. The company has rights similar to those enjoyed by a natural person and can be sued or incur losses. It is owned by shareholders and run by the directors but is more challenging to set up than a partnership or a sole trader entity. Often, budding entrepreneurs purchase an existing business for sale Sydney that has been complying with the Corporations Act 2001 to avoid all the registrations and licensing obligations.

A Trust Business Structure

A trust is a structure in which the trustee manages the business on behalf of the members of the trust (beneficiaries). The trustee can be an individual or a company, which is liable for losses and responsible for income. It is challenging to set up a trust, and the trustee has control over the distribution of beneficiaries.

2. Comparing the Different Business Structures

Budding entrepreneurs who plan to set up a business must know that they must make the minimum investment to establish a sole trader structure and the maximum for a trust. Partnerships and companies lie in the medium to high investment range. Tax and legal obligations are low for sole traders and partnerships.

However, companies have medium tax obligations and high legal obligations, while trusts have high tax obligations and medium legal obligations. A sole trader does not require a separate business account or submit extra reports and has full control over the entity. All other business structures must have a separate business account and follow reporting obligations.

3. Changing Your Business Structure

Many entrepreneurs start as sole traders and then change the structure to a company. It is possible to alter the legal structure of the business after its establishment to increase revenue or make way for changes needed to stay ahead of competitors. Most entrepreneurs opt for this change when they start growing.

However, if you purchase a business for sale in Sydney, which is a company, you do not have to get into these details. A sole trader can be changed to a partnership, and a partnership can be changed to a company. Usually, changing the legal structure requires a new ABN and the transfer or cancellation of the old business name with the Australian Securities and Investments Commission (ASIC).

4. Most Popular Business Structure

Although companies have a complex set-up process and extensive legal obligations, they are the most commonly registered businesses in the country. They are more popular because they have a prevalent business structure that everyone in the industry understands. The shareholders have limited liability, and the profits generated by the business can be divided among them as dividends or invested back into the company.

Securing funding for a company with a good credit score is easier. A company can be easily sold to interested buyers looking for a Sydney business for sale. Another benefit of owning a company is that the losses can be carried forward indefinitely to offset against estimated profits.

5. Choosing the Best Legal Business Structure

The legal business structure must be chosen according to the needs of the entity, such as the licences required for selling the products and the capacity of the venture to pay the taxes. Entrepreneurs can also choose the structure based on the control they want over the entity.

In addition, the financial investment required for setting up the legal business structure and the responsibility for debts and losses must be evaluated before proceeding. Since the legal structure can be changed at any time, you can make the initial decision based on your needs at that juncture.

Wrapping Up

Starting a business requires planning and following legal obligations. The first thing to decide is the venture's legal structure to ensure it can accomplish the business goals and is managed effectively by the owner. Thus, entrepreneurs should choose the structure after careful reflection of the implications.