Skip to 0 minutes and 8 seconds My name’s Linda Boyce. I’m a bookkeeper. I have my own business looking after various companies, partnerships and sole traders. And I also teach here at RMIT University.
Skip to 0 minutes and 24 seconds We have different business structures– sole trader, partnership, and company. Each of those structures have different advantages and disadvantages that will affect how your operations in your business occur. For example, a sole trader, you’re the individual, you manage the business on your own, you receive all the profits of the business, hopefully they’re profits. You have all the responsibility of the business too, though. So you have what’s called unlimited liability. So if there are debts that are incurred in that business, you will personally be held responsible for those debts. So that’s something to consider, is a big consideration in that structure. Partnerships– you might be looking at having someone else come into the partnership.
Skip to 1 minute and 15 seconds Advantages are that you can pool your resources both financially, so more than one person is bringing additional funding into the commencement of the business. But also too, you can bring skills into the business. So one partner could be very strong in a selling and marketing area and the other one could be very strong in an admin role. From a company perspective, the advantages of that company is that it is what’s deemed to be a separate legal entity. So the owners of a company are the shareholders, and they have what’s called a limited liability. So they are not responsible for the debts of the business. Company structure may be the way to go.
Skip to 2 minutes and 1 second Also if you’re looking to employ people, you can employ people in the other structures. However, from a protection point of view, it’s probably better in a company.
It is important to have the correct structure for your business as this can impact on your decision making, profit sharing and legal liabilities.
The three most common business structures are:
- Sole Proprietor
The sole proprietor is a single structure where you own and control the business and receive all the profits, however you also have all the responsibilities. You have what is called unlimited liability which is where you are wholly responsible for any debts incurred by the business.
A partnership consists of between two or more people. An advantage of a partnership is that you can pool resources and the partners can bring different skills into the business. Partnerships have unlimited liability as well, so all partners are responsible for any debts incurred by the business. There is also what is called a mutual agency, which means that the decision of one partner is legally binding on all partners.
A company is a legal entity that is separate from its directors and shareholders. This means that the shareholders have limited liability for the debts of the company. They are liable only for the value of any of the unpaid shares that they may hold. As an example, if you have 50 shares valued at $1.00 each then you are responsible for $50.00 only.
You should discuss with your accountant the best structure for your business as this will affect your decision making, tax implications, profit or loss sharing, legal liability and costs. You can always change your structure as your business grows, so your decision should be based on what is best for you now.
Check out the article in the related links from ‘startupsmart.com.au’ about some considerations to think about when choosing the right business structure for your small online business.
Paul is trying to decide what business structure he should use for his business. If Paul was setting up his business in your country, what business structure would you recommend and why?
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