Which business structure should I choose?
Are you considering what business structure would best suit your new professional practice? Or are you already running an established practice, and want to ensure that the structure suits your needs? It is important that the structure of your professional practice suits the individual requirements of the professionals and the business.
What are the most common types of business structures?
A sole trader involves a person trading as an individual. This means that the proprietor is legally responsible for all aspects of the business, including all assets, liabilities, income and losses.
A partnership arises when at least two people, or incorporated entities, operate a business together.
A company is an entity that has a separate legal existence from its owners. Its legal status gives a company the same rights as a natural person which means that a company can incur debt, sue and be sued. Small business owners often use a type of company structure called a proprietary limited company, which has the words ‘Pty Ltd’ after the name. This type of company does not sell its shares to the public and has limited liability.
There are several types of structures that involve trusts: discretionary (or family) trust, fixed unit trust and partnership of discretionary trusts. Service entity structures also usually utilise trusts. Trustees are subject to general law fiduciary duties and statutory obligations.
What should I consider when choosing a business structure?
There are five key factors that you must consider when choosing a business structure, or deciding to restructure:
- Asset Protection: Asset protection refers to the capacity of a particular structure to safeguard the assets of a practitioner from activities and claims against their business. Your asset protection needs will depend on the risk profile of the business and the owners. Identify who the ‘at risk’ individuals are in your structure. In professional practices, this will usually be the professionals running the business.
- Taxation: Income tax, Capital Gains Tax and Stamp Duty are high priority considerations when choosing an appropriate structure for a professional practice. Each structure has unique tax implications. While it is important to choose a structure that optimises taxation implications, you need to ensure that the choice of structure is not purely motivated by tax avoidance. To ensure that your chosen structure is upheld by the courts, it must be able to be justified by other reasons, such as asset protection.
- Income Splitting: Some structures allow you to split income. This is particularly useful if an owner’s partner earns less income, attracting less tax liability. However, if you are providing a personal or professional service, you will need to be mindful of the anti-avoidance personal services income rules.
- Control: Each structure allows for different levels of control, i.e a sole trader has total control over the practice. Conversely, in a partnership, partners share control of the business. The manner of decision making about the business of the firm may be dictated by a partnership agreement or, in the absence of any statement in the partnership agreement, by consent of all partners.
- Exit and entry, and transfer of assets: Consideration should be given to how easy it is for professionals to enter and exit the practice, and how interests can be transferred. You might start out on your own, but you may decide to add other investors or partners to the business later. It is important that you choose a structure that suits the number of owners of the business, and can flex and adapt to later changes.
Considerations for your business
In order to make an informed decision about the most appropriate structure for your business, you need expert legal and accounting advice. When consulting with your advisors, make sure that you highlight what is most important to your choice and plans for the future. Before doing this, we recommend that you read our new eBook, Successful Structuring for Professionals. We hope that you can use our free eBook as a guide to understanding professional practice structuring so that you can effectively communicate your unique needs to your business advisors.
Want to know what a new business structure could do for your business? Please don’t hesitate to contact our experienced Newcastle commercial lawyers at Butlers Business and Law on (02) 4929 7002 or fill out an enquiry form on our website.