Episode 016 – Business Structures
The first question most of the business planning documentation you find asks you select what business model you want to use! How on earth are you meant to make a decision on what business structure you want when you may not even know what its like to run a business.
This is general information and you should seek the advice of your own accountant or lawyer before making any decision regarding your business structure. There are some fundamental questions that you do need to ask yourself which will help you to tick the right boxes from a legal perspective. Ultimately you are deciding on the level of risk that your business poses to your personal financial assets. All businesses have risk associated with them, you never know what could happen around taxation, debts or the horrible prospect of being sued. These are all real situations, and ones that you do want to spend time on considering. Remember planning now will save you stress, money and valuable time in the future.
How many people in the business
The first question is around number of people involved in the business, will it just be you, or will you have a partner, or will there be more people included in the business either straight away or in the not to distant future.You can change the business structure over the life of the business but you do want to make sure that you start with one that will serve you and your business for the most part. There is nothing worse than figuring out very quickly that you have outgrown something and then the hassle of trying to change it.
Once you have established how many people will be decision makers in the business, then you need to turn your attention to is cost. Each of the different structures have different costs associated with setting them up and keeping them going. Sole traders are the cheapest and easiest to run, you are working solo and there is very little paperwork and ongoing costs to keep this business structure moving forward. Where a company or trust requires yearly costs to be paid and expensive paperwork to be filed. I do encourage finding your self a great accountant, I would be lost without mine. Within the field of accounting there are many facets, taxation accountants who deal with business structures and taxes are required to keep their education up to date each year. Trust me pay them for their expertise and take the stress and worry off your own shoulders.
Taxation is your third consideration, and this varies greatly over the different structures. If you were a sole trader then you are responsible for all the taxation that needs to be paid, a partnership on the other hand is split between the parties. Did you know that a partnership has to have a minimum of 2 parties but it can also have a maximum of 50! That is a massive number of people in a business! A company on the other hand pays tax as a separate entity or person. I hope you are starting to realise that there are many factors to consider when deciding on a business structure.
Personal liability is not something you consider when you start your business, but this is where I have seen businesses come into trouble quickly. If you are a sole trader, you are 100% responsible for everything, all the losses and you can be sued. The same is also for partnerships, but again your liability is split between the parties. You need to be careful in partnerships as partners can create very unfavourable financial situations, spending money behind the backs of other partners leaving the remaining partners to foot the bill.
Companies are very different when it comes to liabilities, as I alluded to above a company is its own legal entity, like a completely different person. It has its own life support as such, therefore the company is liable for taxation, debts and can be sued. Companies have directors and shareholders, under a limited liability structure, shareholders are not liable at all to pay for any taxes or debts. In some cases where directors have personally guaranteed loans or other financial endeavours then they can be held responsible. Otherwise if they are operating within the law and do everything they need to, they can be exempt.
Australian Business Structures
In Australia the business structures are as follows, Sole trader – singular person who is responsible for all the debt but has full control. Then there is the partnership – made up of 2 or more individuals who distribute the income and losses, a company – is more complex with directors and shareholders, but the benefit is the limited liability. You also have trusts – this is an obligation imposed on a person (a trustee) to hold property or assets (such as business assets) for the benefit of others, known as beneficiaries. This is super complicated, and I do not encourage this if you are starting your first business, please please talk with an accountant and get all the facts.
American Business Structures
In the USA the business structures are not that different, you still have the sole trader where you are responsible for everything and you have full control, the partnership structure again is the sharing of the profits and losses with no limited liability available. Limited Liability companies are different it’s a hybrid of partnership and corporation business structures, the LLC allows owners to report business profits and losses on their own tax returns without the business itself being taxed, and provides owners with limited liability protection. Finally in the USA there are corporations, it operates as a separate entity, and is taxed as such. There are two different types of corporations, the “C Corporations” are taxed as separate entities, while “S Corporations” are what they call pass-through entities where taxes are reported on the owners’ individual tax returns.
Your choice is important
Choosing your business structure right from the start is necessary to help you understand how to operate your business moving forward. Business structures are there to protect you and give you the guidelines of the game. For the most part I see probably 75% of small business here in Australia and in the USA are sole traders. It is so much easier and cheaper to run, with minimal costs. As always check with your accountant to make sure what you are planning on doing will be right for you. When starting a business its great to surround yourself with people who can give you the right information quickly, you don’t have the time to be flalling around trying to figure things like this out.
I have included two different downloads today, as my wonderful audience is split between Australia and the United States, there are separate sheets for you to download and check out. Take these to your accountant when you are setting up your business and use it as a great cheat sheet to guide you in the setup process! This is my quick little guide to help you make the first decision in your small business dream!
Download and additional help.
Please head on over and download either the Australian or American business structures to help you in your business planning. Please as always share your ideas in the group or ask for help! If you are not part of Plan to Profit community then please check out the link below and join our brand-new community!
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From a young age I have been surrounded by business success. Having formally studied a Double Degree of Bachelor of Commerce and a Bachelor of Management, this led to many successful opportunities.
I have been an employee for large accounting firms and international companies. I have run two highly successful businesses, becoming sought after in my industry internationally.
I have spoken nationally on the topic of money management and loved having the quiet coffee making radical changes for my clients. I am not a limelight chaser, just a quiet achiever looking to make a difference in the world.
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