When starting a business, choosing the right business structure is crucial as it affects various aspects of your business, including liability, tax obligations, and decision-making processes.
There are several types of business structures to choose from, each with its own advantages and disadvantages. In this blog article, we will explore the different types of business structures and the pros and cons of each.
Sole trader
A sole trader is a business owned and run by one person. This type of business structure is the simplest and most straightforward to set up and maintain.
Pros:
Easy to set up – setting up a sole trader business is simple and straightforward.
Flexibility – as the owner of a sole trader business, you have complete control over all aspects of the business, including decision-making and management.
Lower costs – compared to other business structures, the costs of running a sole trader business are lower as there are no legal or compliance requirements.
Cons:
Unlimited liability – as a sole trader, you are personally responsible for all debts and obligations of the business.
Limited growth potential – sole trader businesses have limited growth potential as they cannot raise capital through the sale of shares.
Partnership
A partnership is a business owned and run by two or more people. In a partnership, each partner contributes money, property, labour or skill, and shares profits and losses.
Pros:
Shared responsibility – in a partnership, the burden of running the business is shared among the partners, reducing the workload for each individual.
Access to more resources – partnerships have access to a larger pool of resources, including capital, knowledge and skills, making it easier to grow the business.
Cons:
Unlimited liability – similar to sole traders, partners in a partnership are jointly and severally liable for all debts and obligations of the business.
Decision-making difficulties – decision-making in a partnership can be difficult as each partner must agree on all decisions.
Company
A company is a separate legal entity from its owners, allowing it to enter into contracts, sue or be sued, own assets and liabilities. A company is owned by its shareholders and managed by its directors.
Pros:
Limited liability – the shareholders of a company are generally only liable for the amount they have invested in the company, providing protection for their personal assets.
Ability to raise capital – companies can raise capital through the sale of shares, making it easier to grow the business.
Cons:
Complex compliance requirements – companies have complex compliance requirements, including the preparation of financial statements and the payment of corporate tax.
Costs - complex compliance means more costs.
Trust
A trust is a legal arrangement where a trustee holds property or assets on behalf of one or more beneficiaries. Trusts are commonly used for tax planning and asset protection, as well as estate planning and the distribution of wealth to beneficiaries.
Pros:
Asset protection – trusts can protect assets from creditors, as the assets are held by the trustee and not by the individual.
Tax planning – trusts can be used to minimise tax liabilities by distributing income to beneficiaries in lower tax brackets.
Cons:
Complex compliance requirements – trusts have complex compliance requirements, including the preparation of financial statements and preparation of trustee distribution resolutions directing distributions in the case of discretionary trusts.
Costs - as with companies, increased compliance equates to more costs.
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