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

  • Liability of the shareholders is limited.
  • Attractive to investors as ownership can be easily transferred.
  • Favourable taxation rates.
  • Access to a wider pool of working capital and skilled workforce.

Cons

  • Somewhat complex and expensive business structure to establish and maintain
  • Reporting obligations to ASIC.
  • Directors can be held liable for breaches of the Corporations Act 2001 (Cth).
  • Profits distributed to shareholders are taxable.

Before determining which business structure is right for your business, you should seek advice from a Bespoke corporate lawyer.

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Ryan Solomons
Categories:
Commercial & Corporate
Employment

Posted on: 21 March 2018