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I’m Starting My Own Business as a Tradesman, What is the Best Business Structure for Me?

By 16 December 2015Business
sole trader or company

There is no “one structure fits all”. The unique aspects of each particular business need to be considered when deciding on the best business structure for you. Choosing a business structure is not a static process; with many businesses changing their business structure over time.

There are broadly four types of business structures, as follows:

Sole Trader

As a sole trader, you are the business. You have control of everything that makes up the business.

This is the most popular way to structure a business, particularly for those starting a new business, as it is generally the least expensive and time consuming to establish.

The key risk is that the business does not have a legal identity separate to you. In other words, you and the business are the same. Any loans, credit facilities, supplier guarantees, and any other debts or liabilities that you enter into while running your business become your personal responsibility.

All the risk and responsibility is assumed by you whether or not your business succeeds. For example, if your business is unsuccessful, these debts and liabilities that you entered into may be enforced by the creditors against your personal assets.

When deciding if a sole trader is right for you, it is important to consider the way that similar businesses in your industry are structured, your concerns over this personal risk and liability for business debts, and whether you are able to afford the higher expenses associated with the other types of business structures.

There are strategies that can be implemented to protect your personal assets and, should you require further advice in this regard, please do not hesitate to contact our Matthew Tyrrell or Brendan Pitman.

Partnership

A partnership structure is similar to that of a sole trader, with the main difference being that two or more people make up the business. There are varying ways that you can structure a partnership.

This type of structure requires you to trust those people in the partnership. This is because you are not the only one in control of everything of the business; your partners in the partnership are also in control of everything in the business.

It is common for a dispute to arise in a partnership whereby one partner has committed the partnership to an obligation that the other partner/s do not agree. All partners of the partnership will be liable for the debts and liabilities of the business.

Trusts

Trusts are a particularly complicated area of the law. There are significant advantages for a business owner if a trust is set up properly.

A trust is unique; it is not a separate legal entity, however, a trust isn’t you either. Rather, a trust is a legal relationship between a group of people.

There are many types of trusts, however regardless of the particular type of trust chosen, a trust gives you flexibility in how income is distributed. There are also particular tax benefits in structuring your business as a trust.

Given the complexity of this area of law, we strongly recommend that you contact our office before choosing this business structure.

Company

Unlike the above three types of business structure, a company is a separate legal entity. This means that you and the company are two separate things.

A key benefit of this structure is that you do not assume all risk and responsibility for the debts and liabilities of the business. This is particularly appealing as it provides a level of separation between what your business owes and your personal assets.

In the practice of business, it is common however for a creditor of your business to require you to provide a personal guarantee when running your business as a company. This means that, in the event the company is unable to meet the debt or liability to the creditor, the creditor may pursue you personally for enforcement of the debt or liability.

There are strategies that can be implemented to reduce your personal liability and we invite you to contact our Matthew Tyrrell or Brendan Pitman in this regard.

When choosing a company, it is important to understand that the officers of a company (for example, Director/Secretary) are under strict duties. It is critical to understand these duties as, in the event that your business is unsuccessful, you may be pursued for any debts or liabilities of the company if you are in breach of these duties.

This article has not considered the additional tax consequences associated with each of the above business structure and recommend that you seek advices from your accountant in this regard.

Should you have any queries, please do not hesitate to contact our Matthew Tyrrell or Brendan Pitman.