Business Blog No. 5 – Legal Structures

You have now developed your trio of key foundation statements:  ”Mission Statement”, “Vision Statement” and “Values Statement”.

Next, it is time to look at the structure of your entity to ensure it is meeting your business requirements. The first structure question is the legal structure of your organisation.

If it is just you or you are just starting out, operating as a sole trader is the simplest and cheapest structure. Your income and deductions go through your own personal tax return. You are solely responsible for decisions but have no protection from personal liability if sued.

Partnership is the next option if you are operating with a partner/s with distribution of profits/losses split between partners. Each partnership has its own Australian Business Number (ABN) and Tax File Number (TFN) and Tax Return, but income tax is paid by each individual partner on their share of partnership income. It is best to have a formal signed partnership agreement to ensure the partnership operates as you intend it. It is relatively cheap to create, but each partner is personally liable for partnership liabilities even if caused by another partner.

A Company is a separate distinct legal entity, hence has its own ABN and TFN, lodges its own tax return and pays its own tax. It is owned by shareholders and run by its directors and is relatively expensive to create as well as having ongoing reporting requirements and costs with the regulator ASIC. Being a separate legal entity, the assets and monies earned by the company belong to the company. Shareholders receive income via dividend distributions. The key advantage is that shareholders are protected from being personally liable if the company is sued. Directors can however be held personally liable in some instances for company debts and liabilities.

The forth legal structure option is a Trust. Trusts can be expensive and complicated to create but are attractive in terms of asset protection and can offer tax effective income distribution benefits. The Trust Deed explains clearly how the Trust is to operate. A Trust has its own ABN and TFN and may be liable for tax under certain circumstances.  The Trustee (an individual or company) operates the Trust with the Beneficiaries receiving taxable distributions from the Trust. The trustee is personally liable for all contracts the trust enters into with the Trust

Use this week to consider which business structure best suits you and your entity. Speak to your Accountant or Legal Advisor should you need to seek further advice.

Next week we will look at the internal organisational structure of your entity as you continue building a sound foundation for business success.

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