Understanding the difference between the various types of business structures is vital when starting a business. This key decision is based on various aspects of your business, its vision, and how you want to run it.
What is a business structure?
A business structure is the term used to describe the legal recognition of your business. As different business structures have different legislative requirements, it is important to ensure that it is clear what structure your business is using and that your business is meeting these legislative requirements.
The four main types of business structures include:
- Sole trader
We encourage you to contact us to obtain expert advice on what business structure will be the most suitable for your business.
This business structure is one of the more simplistic options available and is inexpensive to set up in comparison to other business structures. If you plan to use this business structure for your business, it is important to be aware that you will be legally responsible for all aspects of the business, including losses and debts owed to creditors.
The main benefit of this business structure is that it provides you with full control over the business, fewer legislative requirements, and it is inexpensive to establish.
The partnership business structure involves two or more people running the business and distributing the profits and losses between themselves. A partnership is often set up through a partnership agreement which needs to be carefully drafted to ensure that all parties to the partnership are protected. There are different types of partnerships which our lawyers will be able to assist in choosing the most appropriate type for your business.
The advantages of this business structure are that it is inexpensive to set up, it has fewer legislative reporting requirements, and it enables you to combine resources with other people (i.e., the partners).
The main disadvantage for a partnership is that all partners are personally responsible for any debts incurred by the partnership. It is therefore extremely important to consider who you wish to establish a partnership with.
Companies as a business structure is one of the most common ways businesses tend to be structured. There are several legal processes involved in setting up a company correctly, so it is strongly encouraged to seek the assistance from the lawyers at GLG Legal who have extensive experience in setting up companies.
The primary benefit of this business structure is that it forms a separate legal entity which provides many benefits including, but not limited to, being able to sue and be sued and being able to own property. Another benefit is that there is the option between a public and private company which will influence how your business can raise capital. Your business, its size, and turnover are all determining factors as to whether your company is more beneficial in being a private company or public company. Our lawyers will be able to assist you in your choice.
The main disadvantage is that companies are heavily regulated by legislation and they can be expensive to set up. In particular, public companies have further reporting requirements which may become onerous if it is not the correct business structure for you.
A trust is an obligation imposed on a person to hold property or assets for the benefit of the beneficiaries. Operating a business as a trust can be expensive and does require the trustee to undertake various administrative tasks in the process.
There are different types of trusts and depending on your business’ needs, we will be able to assist you in determining which type of trust is the most appropriate for your business.
The main advantages of this business structure are that they are very flexible when it comes to tax purposes and the beneficiaries will not be held responsible for any debts incurred by the trust. The main disadvantage is that a trust is a complex legal structure and the operation of a trust is restricted to what is outlined in the trust deed.
Why it is important to consider the different business structures available
It is vital to choose a business structure that reflects your business’ needs as it will determine many factors and limitations that you will have when running your business. For example, depending on which business structure you eventually choose, the following may vary:
- How much tax you pay
- What legal documents are required
- If and what licences you may require
- Whether you are an employee or the owner of the business
- Whether you are personally liable for any debts incurred by the business
- How much control you have over the business and its operations
- The ongoing cost and reporting requirements
It is also possible to change your business structure through restructuring should the business structure you had originally chosen no longer suit your business’ needs. It is encouraged to seek legal advice when your business is undergoing major changes to see if a different business structure may be more suitable for your business and its interests.
Having the right business structure is an essential step in creating a business so it is important that you get it right in order to prevent any repercussions occurring to your business later. Our lawyers at GLG Legal have worked extensively with different business with various types of business structures and can assist you in determining which business structure is the most appropriate for your business.
We can assist you with ensuring that you are aware of all your legal requirements under that business structure and draft the appropriate legal documents that are unique to your business and its interests.