Whether you are contemplating a new venture, or a shakeup of your existing business, the New Year is a great time to ask – which business structure is right for me?
Every business is different, but they share a raft of common concerns. The three most commonly used vehicles are sole trader, partnership and private company. Each strikes a different balance between risk and reward.
A sole trader gets your business off the ground fast with minimal compliance burdens. Start-up costs are low and any income derived is considered personal income and taxed at the relevant tax rates. If the business tires or grows rapidly, it’s easy to close it or expand into a new structure. The inherent risk is that you are personally liable for all business expenses; your personal assets are exposed to risk.
If going solo isn’t appealing, partnerships are a common alternative, but dangerous. With similar perks to sole traders, a partnership has the added benefit of shared knowledge and resources. New partners can be added as the business grows. Apart from personal liability, the greatest threat to a partnership is infighting between partners. All debts incurred by another partner, even where done without partnership consent, can land in your lap. Should one partner decide to leave, the entire partnership could be dissolved (and your business along with it).
The universally preferred structure is a private company. The biggest advantage is limited liability which quarantines company losses and protects against most personal liability for company debts. Companies can be run by one person or expanded by issuing shares. A company is expensive to establish, maintain and dispose of. It is subject to regulatory and reporting obligations. Directors are burdened with fiduciary duties. A failure to comply with these duties can attract financial and criminal penalties. The single most overlooked problem with a company is getting your money out as a “shareholder”; you’ll need a lawyer and that is best done well before you want to get out.
There are real advantages to choosing the most suitable structure for your business, and it’s never too late to make a change that could better protect your assets, reduce your costs or expand your business into the future. What suits one won’t necessarily suit another so always take the time to get proper advice – it could save you considerable time and money.