Key Business Structures for your Startup
Before thinking about hiring a startup team, or how you can grow or scale your venture, you should consider the fundamentals. This includes how you should structure your business so that you are adequately setup for long term success. But what is a business structure? Your startup’s business structure is the legal entity that informs the day-to-day operation of your venture, including which procedures to follow, the amount of tax you will be liable to pay, and how your startup can protect your assets.
As a founder there are numerous options for you to choose from such as being in a partnership, operating as a sole trader or establishing yourself as a company. The best business structure for your startup will depend on your individual needs, the size of your venture and your business goals. At Allied Legal, we have laid out a few business structure options, their advantages, and disadvantages to assist you in determining the best choice for your startup.
Suitable for small businesses
A sole trader is an individual or founder who is legally responsible for all aspects of the startup. The main advantage of a sole trader business structure is that it is simple and quick to get started. Operating as a sole trader will mean trading under your own name or your business name, without having to set up a formal legal entity such as a company, partnership, or trust. This will save your startup time, money, and laborious formalities. The primary disadvantage of running under a sole trader business structure is that your personal liability is unlimited. Operating as a sole trader is best suited to small businesses operated by one founder where income-splitting is not a consideration.
Suitable for small to medium sized businesses
Partnerships are typically made up of two or more people who trade together under a business name without setting up a company. Due to this fact, partnerships are relatively simple to set up. Before engaging in this sort of business structure, you should ensure that you and your partner have a written partnership agreement, outlining both of your rights and obligations in case there is a falling out. This is particularly important as partners are liable for the debts of the partnership. This is commonly referred to as being ‘jointly and severally’ liable. A partnership business structure is typically adopted by professional service providers including accountants, engineers, medical practitioners, and lawyers. To learn more about partnerships, you can follow the link.
Proprietary Limited Company
Suitable for startups and innovative enterprises
Operating a company business structure will mean creating a legal entity that is separate from you. Setting up as a company has several advantages including that – as a shareholder – your liability is limited to the amount you have invested in your startup. Another advantage of operating as a company is that investors can invest in your startup by buying shares – this is not possible with a sole trader or partnership. The main disadvantage of a company business structure, however, is the costs associated with establishing and operating a company. A company must also comply with legal and regulatory requirements, including statutory directors’ duties, and you will be personally liable if you breach these duties. It is often the case that companies are the best structure for startups and innovative enterprises.
Suitable for family businesses
A trust is a relationship where a trustee operates on behalf of other people – the beneficiaries. The main advantage of a trust structure is its’ relative flexibility. A trust may be discretionary, or it can have fixed interests. To read more about the advantages of trust structures, you can follow the link. The main disadvantage of running your business under a trust structure is that trusts are not always well understood which can create confusion. We recommend consulting a commercial lawyer if you are unsure how to proceed with this type of business structure.
Unit Trust Structure
Suitable for medical practitioners or property investors
Increasingly we are advising on multi-practitioner medical practices. We find that a unit trust structure tends to suit the needs of specialist practices like a doctor’s clinic. In a unit trust structure, a trust is established, and a company acts as trustee of the trust. It is common to see each doctor’s holding entity be issued with units in the trust while shares in the trustee company are personally issued to each doctor. This structure allows individual parties to maintain a service entity together, relieving them of managerial duties, while each practitioner gets to manage their practice separately. Practitioners as unitholders also have the flexible option of joining or leaving the practice.
Unit trusts are also commonly seen in property investments, as it allows several parties to invest in a property development which will be ultimately managed by the trustee. You can read more about unit trust structures and agreements via the link.
Suitable for not-for-profits
Under the ‘charity’ banner there are two primary types of business structures – incorporated and unincorporated –that your startup may opt for. This will involve some thought as to the size of your charity, the complexity of your activities, whether you will employ a team, your grant applications and whether your charity will operate in one or more states or territories. We strongly recommend that you seek the advice of a commercial lawyer during the early stages to ensure that you have a good grasp on the advantages and disadvantages each option affords. If you would like to learn more about what is required when setting up a charity, you can follow the link.
Need Help? Contact Us
At Allied Legal, we set up startups of every size on a regular basis so if you need business structure help, we recommend speaking with one of our commercial lawyers. To get in touch you can connect with us on 03 8691 3111 or send us an email at email@example.com.