Choosing Business Structure for Australian Start-ups

The assignment requires students to analyze the advantages and disadvantages of various business structures in Australia, such as sole trader, partnership, and company. Students must also consider factors like tax rates, liability protection, and management complexity when choosing a suitable business structure for their Australian start-ups.

Running head: BUSINESS STRUCTURES 0
Business Law
Assignment

BUSINESS STRUCTURES 1
Table of Contents
Introduction................................................................................................................................2
Business Structures....................................................................................................................3
Sole Trader.................................................................................................................................3
Advantages.............................................................................................................................3
Disadvantages........................................................................................................................4
Partnership..................................................................................................................................5
Advantages.............................................................................................................................5
Disadvantages........................................................................................................................6
Company....................................................................................................................................7
Advantages.............................................................................................................................8
Disadvantages........................................................................................................................9
Conclusion................................................................................................................................10
Bibliography.............................................................................................................................11

BUSINESS STRUCTURES 2
Introduction
Choosing the legal structure for a business is an important decision which is taken by its
owners. The decision has a significant impact on different areas of the business including
legal liability, control over operations, and payment of tax1. It is a crucial decision and
owners are required to evaluate different factors in order to select a suitable structure for the
business such as control, limitation of liability, tax implications, flexibility and future needs,
continuity of existence, on-going administration and others2. A legal structure can be changed
by its owners as the business grows or changes. This report will focus on analysing different
business structure by evaluating their key characteristics. Further, the report will compare and
contrast between advantages and disadvantages of different business structures.
1 ASIC, Your business structure, 2018 <http://asic.gov.au/for-business/your-business/your-business-structure/>
[accessed 21 March 2018].
2 Australian Government, Business structures and types, 2017 < https://www.business.gov.au/info/plan-and-
start/start-your-business/business-structure/business-structures-and-types > [accessed 21 March 2018].

BUSINESS STRUCTURES 3
Business Structures
In Australia, there are three different business structures which are commonly used by
owners3.
 Sole trader
 Partnership
 Company
Each of these structures has different responsibilities and liabilities which affect costs, asset
protection, tax liability and other factors in a business. Owners are not locked in a structure,
and they have the option to change the structure as the business grows or changes4. In order
to select a suitable structure for a business, owners are required to look into advantages and
disadvantages of each structure.
Sole Trader
In a sole trading business structure, a person runs the operations of the business and he/she is
responsible for handling different tasks. In this structure, debts and losses of the business are
not shared with anyone else. It is a simple and relatively inexpensive structure for starting a
new business. As a sole trader, the owner of the business generally take all decisions
regarding starting and running the operations, although he/she can employ people for help as
well5.
Advantages
Control
In sole trading structure, the owner has full control over operations and decisions of the
business. The owner can run it how they please and take business decisions without the
interference of others.
Profit Retention
3 Australian Government, Business Structure, 2018 <https://www.business.gov.au/Info/Plan-and-Start/Start-
your-business/Business-structure> [accessed 21 March 2018].
4 Legal123, How to choose the right business structure in Australia, 2016 < http://legal123.com.au/how-to-
guide/business-structure-australia/ > [accessed 21 March 2018].
5 Sally Weller, Erin F. Smith, and Bill Pritchard. "Family or Enterprise? What shapes the business structures of
Australian farming?." (2013) 44(2) Australian Geographer 129,142.

BUSINESS STRUCTURES 4
Sole traders are the sole owners of the business which means they retain all the profits of the
business. They did not have to share or distribute the revenue to any other person. However,
the salary of employees, if any, is required to be paid from the profits6.
Private Data
The information regarding working and operations of the business in sole trading remain
private in this structure. The information about the business and the owner kept private,
unlike, limited companies as their information is public. There is also no reporting
requirement for a sole trader.
Specialist
Often people prefer sole traders because they are able to provide a more personal service to
local customers than compared to an organisation. The speciality in personal service is more
appealing to potential customers, especially in local communities.
Efficiency
Due to lack of reporting and full control over operations, sole traders are able to make
decisions more quickly than compared to other business structures. It improves efficiency in
the business by making it simpler to operate.
Disadvantages
Liability
Sole traders did not have a separate entity in the eyes of the law, like a limited corporation7.
Therefore, they are subject to unlimited liability. This means business owners can be held
personally liable for repaying the debts of the business. The court can give order them to pay
their business debts by selling their personal assets and by using their personal savings that
they have both inside and outside the business.
Finance
6 Australian Government, Sole trader, 2017 < https://www.business.gov.au/info/plan-and-start/start-your-
business/business-structure/business-structures-and-types/sole-trader > [accessed 21 March 2018].
7 Australian Government, Difference between a sole trader and a company, 2017 <
https://www.business.gov.au/info/plan-and-start/start-your-business/business-structure/change-business-
structure/sole-trader-to-a-company/difference-between-a-sole-trader-and-a-company > [accessed 21 March
2018].

BUSINESS STRUCTURES 5
Sole traders are the only investor in the business, and they find it difficult to raise finance for
their business. Due to lack of financial support, they face difficulty while expanding their
business in the future.
Decision making
Sole traders make all the decisions in the business which means the owner have to take all
decisions without assistance from others. Therefore, the success or failure of the business
entirely depends upon the decisions of the sole trader.
Reverse Economies of Scale
Sole traders are unable to benefit from economics as compared to limited corporations and
larger firms who invest heavily to purchase in bulk which enables them to charge higher
prices for their projects or services8.
Partnership
In a partnership business structure, a number of people joined together in order to carry on a
business. People select partnership business structure over sole trader if they are entering into
a business with another person or a number of people (cannot exceed more than 20 people)9.
Partnership business structure is divided into two parts – general and limited.
Advantages
Capital
A partnership firm can include up to 20 partners which mean they are able to fund the
business with start-up capital. More partners mean more capital for the business which
provides better flexibility and potential growth options10. The number of partners is higher
than compared to a sole trading business which means more capital for the business, but it is
lower than a company since it has the options to raise capital from the public11.
8 Australian Taxation office, Sole trader, 2016 < https://www.ato.gov.au/Business/Starting-your-own-
business/Before-you-get-started/Choosing-your-business-structure/Sole-trader/ > [accessed 21 March 2018].
9 Small Business, Partnership, 2018 < https://www.smallbusiness.wa.gov.au/business-advice/business-
structure/partnership > [accessed 21 March 2018].
10 Adam Wozniak, How to start a business in Australia – Choosing a Business Structure (Partnership), 2018 <
http://www.wecancreate.com/blog/legal-issues/start-business-australia-choosing-business-structure-partnership/
> [accessed 21 March 2018].
11 Australian Government, Partnership, 2017 < https://www.business.gov.au/info/plan-and-start/start-your-
business/business-structure/business-structures-and-types/partnership > [accessed 21 March 2018].

BUSINESS STRUCTURES 6
Flexibility
It is easy to form, manage and run a partnership as compared to a company, whereas, it is
more complex than compared to a sole trader. There are less strict reporting and governance
requirements as compared to a corporation whereas they are more complex than a sole trader.
Shared Responsibility
In a partnership, each partner shares the responsibility of running or operating the business. It
allows them to contribute to the business decision-making process by using their abilities
which assist in taking beneficial business decisions. Unlike sole traders, the success or failure
of the business depends upon the decisions of each partner.
Decision making
While taking business decisions, partners can share their expertise to help each other out in
taking effective business decisions. More partners more brains which allow them to take
collective decision for solving issues relating to the business. Expertise of each partner assists
in decision-making process whereas sole traders take their business decision without
assistance from others.
Disadvantages
Disagreements
Unlike sole traders, partners have to discuss and take collective decisions in the business
which increases the chances of disagreements between partners. It is obvious that people have
different ideas regarding how a business should run and operate which creates disagreements
between partners which might lead to disputes. Often disputes result in dissolving a
partnership which is not the case in sole trading structure.
Liability
General partnerships have unlimited liability which means each partner share financial risks
and liability of the business, just like a sole trader. However, partners have the options to
create a limited liability partnership in which their liability is limited to the capital that they
invest in the business. This structure is similar to a limited liability company without
limitations such as complex reporting process while still taking advantages of the flexible
business model.

BUSINESS STRUCTURES 7
Agreement
All the partners have to sign a partnership agreement which lays down terms of the
partnership. This means partners have less freedom in some circumstances than compared to
a sole trader. However, as compared to a limited company, the partnership business structure
is relatively flexible.
Taxation
Just like sole traders, partners have to pay tax and submit self-assessment tax return each
year. They are registered a self-employed and subject to a greater level of personal taxation
than compared to a limited company. Therefore, in some cases, setting up a limited liability
company is a more suitable option than compared to a limited liability partnership12.
Profit Sharing
In a partnership, partners share profits as per their profits sharing ratio which is provided in
the partnership agreement. Generally, partners share equal profits or based on the ratio of
their capital contribution. Unlike sole traders, sharing of profits may create conflict between
partners result in the dissolution of the partnership13.
Company
A company business structure is suitable when starting or growing a business. A corporation
has separate legal entity from its owners, unlike sole traders or a partnership firm. This means
that a company is an artificial person who has individual rights and liabilities and its owners
cannot be held personal liability for its debts14. It is a complex business structure then
compared to a sole trader and a partnership firm, based on its administrative costs and
additional reporting requirements. A corporation is registered with Australian Securities and
Investment Commission (ASIC), and it has to comply with the regulations providing in the
Corporations Act 2001.
Advantages
Separate Entity
12 Australian Taxation Office, Partnership, 2018 < https://www.ato.gov.au/Business/Starting-your-own-
business/Before-you-get-started/Choosing-your-business-structure/Partnership/ > [accessed 21 March 2018].
13 Legal Vision, Company or Partnership: Which business structure works for you?, 2014 <
https://legalvision.com.au/company-partnership-business-structure-works/ > [accessed 21 March 2018].
14 Australian Government, Company, 2017 < https://www.business.gov.au/info/plan-and-start/start-your-
business/business-structure/business-structures-and-types/company > [accessed 21 March 2018].

BUSINESS STRUCTURES 8
A company has a separate legal entity which is different from its owners which means it can
purchase and sell properties in its name and entered into a contract with other parties. It also
means that a company has perpetual succession which means it will continue to exist even
after the death of its owner which is not the case in sole traders and partnership firms as they
cease to exist as their owners die. The directors of a company are protected under “corporate
veil”, and they cannot be held personally liable for actions of the company. However, its case
of fraud or deceptions, the court can use doctrine of “piercing of corporate veil” to held
director liable for their actions15.
Limited Liability
A company has limited liability which means its owners or members cannot be held
personally liable for its debts or liabilities. The members are only responsible for the amount
of capital invested by them into the firm’s operations and their personal assets be used for
settling company’s debts unlike sole traders and general partnership structure.
Taxation and Tax Advantages
Limited companies are taxed on their profits. For base rate entities (turnover less than $25
million), the tax rate is 27.5 percent, and for other corporations, the current tax rate is 30
percent16. Unlike sole traders and partnership firms, the income of a company did not include
in the personal income of its members. There are a number of deductions and exemptions
available for companies which provide tax advantages to them. The members can claim
deductions for train, bus, aeroplane and taxi fare and other accommodations costs such as
hotel, travel, food and others. Members can also pay themselves salaries from company’s
income which provides them tax advantages.
Capital Raise
It is relatively easier for companies to raise capital from the public which provides higher
growth opportunities than compared to other business structures. The corporations can raise
capital from initial public offering, reverse takeover, bank loan, mortgage of assets, and
others.
15 Marc Walsh, 5 Common Business Structures in Australia, 2018 < https://www.altusfinancial.com.au/latest-
news-1/5-common-business-structures-in-australia > [accessed 21 March 2018].
16 Australian Taxation Office, Company tax rates, 2018 <https://www.ato.gov.au/Rates/Company-tax/>
[accessed 21 March 2018].

BUSINESS STRUCTURES 9
Disadvantages
Cost
Establishing a company is relatively expensive than compared to a sole trader and a
partnership firm. Members have to comply with a number of complex requirements and pay
different fees for starting a company such as legal, rent, insurance, brochures, consultation
and others17.
Complex Regulations
There are a number of complex and restrictive regulations which are necessary to comply by
a company regarding maintenance of its accounts. As compared to a sole trader and a
partnership firm, corporations have to comply with strict reporting system which requires
them to submit annual reports. Managing and operating a company require assistance from a
number of professionals who perform different duties in order to ensure that the firm is
operating effectively18.
Control
In order to effectively control a company, directors are required to delegate their duties to
different employees which makes the process of controlling complex than compared to a sole
trader and a partnership firm. There is more complex controlling system in corporations as
compared to a sole trader and a partnership.
17 State Library Victoria, Companies, 2018 < https://guides.slv.vic.gov.au/companies/structures > [accessed 21
March 2018].
18 Dudley Kneller, Guest post from a Technology Lawyer: Which Australian Business Structure is right for your
start-up?, 2015 < http://www.buzinga.com.au/buzz/australian-startup-business-structures/ > [accessed 21 March
2018].

BUSINESS STRUCTURES 10
Conclusion
In conclusion, each business structure has different advantages, and disadvantages and
owners are required to analysing them before selecting a suitable structure for them. The sole
trading business structure is relatively inexpensive than compared to a partnership firm or a
company. However, a corporation structure provides higher growth opportunities than
compared to a sole trader and a partnership. A limited liability partnership incorporates
advantages of a separate legal entity without complex reporting and operating requirements
of a corporation. Therefore, owners should carefully evaluate different advantages and
disadvantages of business structures before selecting the most suitable option for them.

BUSINESS STRUCTURES 11
Bibliography
Adam Wozniak, How to start a business in Australia – Choosing a Business Structure
(Partnership), 2018 < http://www.wecancreate.com/blog/legal-issues/start-business-australia-
choosing-business-structure-partnership/ > [accessed 21 March 2018].
ASIC, Your business structure, 2018 <http://asic.gov.au/for-business/your-business/your-
business-structure/> [accessed 21 March 2018].
Australian Government, Business Structure, 2018 <https://www.business.gov.au/Info/Plan-
and-Start/Start-your-business/Business-structure> [accessed 21 March 2018].
Australian Government, Business structures and types, 2017 <
https://www.business.gov.au/info/plan-and-start/start-your-business/business-structure/
business-structures-and-types > [accessed 21 March 2018].
Australian Government, Company, 2017 <
https://www.business.gov.au/info/plan-and-start/start-your-business/business-structure/
business-structures-and-types/company > [accessed 21 March 2018].
Australian Government, Difference between a sole trader and a company, 2017 <
https://www.business.gov.au/info/plan-and-start/start-your-business/business-structure/
change-business-structure/sole-trader-to-a-company/difference-between-a-sole-trader-and-a-
company > [accessed 21 March 2018].
Australian Government, Partnership, 2017 < https://www.business.gov.au/info/plan-and-
start/start-your-business/business-structure/business-structures-and-types/partnership >
[accessed 21 March 2018].
Australian Government, Sole trader, 2017 < https://www.business.gov.au/info/plan-and-
start/start-your-business/business-structure/business-structures-and-types/sole-trader >
[accessed 21 March 2018].
Australian Taxation Office, Company tax rates, 2018
<https://www.ato.gov.au/Rates/Company-tax/> [accessed 21 March 2018].

BUSINESS STRUCTURES 12
Australian Taxation Office, Partnership, 2018 < https://www.ato.gov.au/Business/Starting-
your-own-business/Before-you-get-started/Choosing-your-business-structure/Partnership/ >
[accessed 21 March 2018].
Australian Taxation office, Sole trader, 2016 < https://www.ato.gov.au/Business/Starting-
your-own-business/Before-you-get-started/Choosing-your-business-structure/Sole-trader/ >
[accessed 21 March 2018].
Dudley Kneller, Guest post from a Technology Lawyer: Which Australian Business Structure
is right for your start-up?, 2015 < http://www.buzinga.com.au/buzz/australian-startup-
business-structures/ > [accessed 21 March 2018].
Legal Vision, Company or Partnership: Which business structure works for you?, 2014 <
https://legalvision.com.au/company-partnership-business-structure-works/ > [accessed 21
March 2018].
Legal123, How to choose the right business structure in Australia, 2016 <
http://legal123.com.au/how-to-guide/business-structure-australia/ > [accessed 21 March
2018].
Marc Walsh, 5 Common Business Structures in Australia, 2018 <
https://www.altusfinancial.com.au/latest-news-1/5-common-business-structures-in-australia >
[accessed 21 March 2018].
Small Business, Partnership, 2018 <
https://www.smallbusiness.wa.gov.au/business-advice/business-structure/partnership >
[accessed 21 March 2018].
State Library Victoria, Companies, 2018 < https://guides.slv.vic.gov.au/companies/structures
> [accessed 21 March 2018].
Weller, Sally, Erin F. Smith, and Bill Pritchard. "Family or Enterprise? What shapes the
business structures of Australian farming?." (2013) 44(2) Australian Geographer 129,142.