Ready, set, start up!

Last year, 10 Australian start-ups made the Global Fintech100. Behind great success there is always great planning. It is vital to choose the right structure. It can impact:

taxes you pay;
personal liability;
attractiveness to investors; and
control over the business.

This is the first of a 2-part series on start-ups. In this series, we will discuss:

business structures (Part 1); and
employee share scheme (Part 2).

Going solo

A sole trader is a business owned and operated by an individual, personally responsible for all aspects of the business, including liabilities.

Pros

Easy to set up and change business structure if your start-up grows.
Sole control over assets and business decisions.

Cons

Personally responsible for debts and liabilities (eg your family home can be seized to pay your debts).
Personally liable to pay business taxes.
Harder to access working capital as such structures are unattractive to investors.
The business does not live on after the death of the sole trader.

It takes 2 (or more) to tango

A partnership is formed by 2 or more people (maximum of 20) who carry on the business together. Partners owe fiduciary duties to each other and to the partnership. Partnerships are governed by state or territory legislation.

Pros

Relatively easy to set up.
Each partner contributes skills, experiences and resources.
Greater borrowing capacity and access to working capital.
Shared control and management of the business with other partners.
Each partner pays tax on their share of the partnership

Cons

Partnerships do not have a separate legal status and therefore partners are jointly and severally personally liable for the debts.
Each partner is an agent of the partnership and liable for actions by other partners
Profits are shared among the partners in the same way as sole traders.
The partnership dissolves each time a partner leaves and it is difficult to value partnership assets.

In good company

A company is a separate legal entity which can own property, operate a business, incur debt, sue or be sued. Companies provide for the separation of ownership (shareholders) and management (directors and employees). Directors have duties to the company.

Pros