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).
A sole trader is a business owned and operated by an individual, personally responsible for all aspects of the business, including liabilities.
- Easy to set up and change business structure if your start-up grows.
- Sole control over assets and business decisions.
- 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.
- 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
- 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.
- 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.
- 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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Commercial & Corporate
Posted on: 21 March 2018