How To Choose The Right Business Structure For Your Business?

Navigating your life towards successful entrepreneurship involves taking a few vital initial decisions. The first is finding a viable business idea, and the second is choosing the right business structure. A huge part of your entity’s progress and development depends on the latter. It helps decide how the business will run, who will make the critical decisions and what taxes it will have to pay.

Thus, business owners in Melbourne must choose the structure after deliberation and thorough assessment of the different types. Making the wrong choice can entangle them in legal complications and operational hassles. Getting it right in the first place is essential for unhampered growth. So, here is everything you need to know to make the decision.

Types of Business Structures

It is essential to know that if you purchase a business for sale Melbourne, you can change its structure if necessary. To pick the correct structure for your organisation, you must be aware of the pros and cons of every type. So, understand each one of them before going ahead.

1. Sole Trader

The business is run by an individual and can be operated under his name using a personal bank account. It is suitable for self-employed individuals who do not have staff members, such as yoga instructors, accounting consultants, etc. Passionate individuals who want financial freedom and work independently can choose this structure.

Pros of sole trading

It is the most uncomplicated and straightforward business structure, which requires a low investment. It can be set up quickly and maintained without fuss. The sole trader is in charge of the whole organisation and has all the powers.

The entrepreneur can use his individual tax file number to file the income tax return. The sole trader owns the profits and losses made by the business, and the profits are taxed using the personal income tax rate.

Cons of sole trading

The entrepreneur has personal liability for the business debts and obligations. It implies that if the business fails, the owner can also lose personal savings. They can claim only a few tax concessions, and expansion can be challenging.

2. Company

A company is an independent legal entity that is separate from the entrepreneur. It is owned by the shareholders and does not make the owners liable for the debts. A company must be registered and must adhere to the Corporations Act 2001. It is the perfect choice for those who wish to expand their business. Thus, it is usually the preferred structure for start-ups.

Pros of owning a company

The tax rate for companies is lower than the individual tax rate incurred by sole traders. The shareholders have limited liability, and their savings are unaffected if the business fails. Thus, high-risk business ideas must be structured as a company.

Also, the shareholders can transfer their shares, and all the legal agreements are prepared in the company's name.

Cons of owning a company

A company structure is challenging and expensive to establish and operate. The operations are under the control of the company directors, and the ownership lies with the shareholders. The entity has to make its profits public if required. Its taxation liability includes annual company tax returns, and it has to conduct an annual review and pay a fee.

The directors must complete a solvency declaration annually and can be held liable for business debts if they do not comply with the legal regulations. The profit made by the shareholders is also taxable.

3. Partnership

A partnership structure comprises two or more individuals who share their profits and losses. It must adhere to the Partnership Act of 1958, applicable in Victoria. It can be of three types – General Partnership, Limited Partnership and Incorporated Limited partnership.

If an entrepreneur acquires a business for sale in Melbourne, which is a partnership, it must be dissolved before setting up a company. The Partnership must have separate tax file numbers (TFN) and an Australian Business Number (ABN). It has to register for GST if the turnover exceeds $75,000, and the partners have to take charge of their superannuation arrangements.

Pros of a Partnership

It is easy to establish and is more cost-effective than setting up a company. So, entrepreneurs who want to set up a small business with low investment can opt for this structure. It has limited reporting obligations and does not have to make its profits public. It capitalises on the expertise and resources of partners and can receive tax benefits if they belong to the same family members, such as brothers or husband and wife.

Cons of a Partnership

The partners are collectively responsible for the business debts while the tax is charged at the personal tax rate. The ownership of the business cannot be transferred to others until every partner agrees. Any dispute between partners can affect the entire organisation and lead to disruption or downtime.

4. Trust

A trust is an entity that holds capital on behalf of the beneficiaries. A trustee can be an individual or a corporate trustee which runs the business and controls it. However, the profits are distributed among the beneficiaries of the trust.

Pros of a Trust

A trust provides asset protection and limits liability. The assets are not controlled by the owner. The taxes are paid on the income of the beneficiaries at their marginal rates.

Cons of a Trust

An individual trustee is liable for the debts of the trust. In the case of a corporate trustee running the business, the beneficiaries are protected by the limited liability of the entity. A trust cannot use the profits to scale up the business because the income has to be distributed. Also, it is expensive to set up a trust and to dissolve it can be challenging.

How to Choose the Right Business Structure?

The decision should be based on the requirements of the business owner. You must establish a company to grow the entity and secure funds from investors and partners. Partnerships are preferable for those who wish to gain from tax benefits and can accommodate others in taking control of the business.

Conversely, if you plan to fly solo using your skills to start a consultancy or service-based business, you can opt for sole trading. However, if you are not willing to take the liability risk, you can start a company to stay protected.

Conclusion

Entrepreneurs must consider each structure's risk factors and growth prospects to evaluate its feasibility and synchronisation with their business plans. They must take the advice of their accountant to identify the most suitable business structure for their organisation.