Consultative Report: Business Structure Options for Software Startup

This report provides a comprehensive analysis of business structures, specifically focusing on the suitability of a sole trader versus a corporation for a software development startup. The report begins by outlining the available business structures, including sole trade, corporation, trust, and partnership, with the primary focus on sole trade and corporation given the client's interests. It then delves into the advantages and disadvantages of each structure, considering factors such as control, liability, ease of setup, and access to capital. The report recommends a sole trader structure initially, allowing the client maximum control over marketing and business rollout, with the option to transition to a corporation as the business grows to protect the client's intellectual property and facilitate expansion. The advantages of a corporation, including limited liability and access to investment, are highlighted, as well as the disadvantages of a corporation like loss of control. The report concludes by emphasizing the importance of choosing the right business structure based on the client’s specific needs and long-term goals.

Running head: Business LawPAGE \*
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Name of the Student
Name of the University
Author Note:

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Table of Contents
Part I Business Structures 3
Part II: Report on Business Structure Suitable for Client 5
Sole Trader as advisable Business Structure to Start 5
Advantages of a Sole Trader 5
Disadvantages of a Sole Trader 6
Corporation as the Eventual Business Structure 7
Advantages of a Corporation 7
Disadvantages of a Corporation8

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To,
(i) Mr. _________________,
________________________,
Subject: Consultative Report for Mr. Jason Brown on the issue of Business Structure
Part I Business Structures
There are generally four options which are available for startups that are looking to
establish in the business of software development. These are:
● Sole Trade
● Corporation
● Trust;
● Partnership
Understanding from the circumstances that Mr. Jason Brown is not interested in business
structure of a Trust, so we will not be discussing the same as an option. The business structure
that is best for the Mr. Jason Brown (hereinafter referred to as the “Client”) depends on his
personal circumstances and the first step is to understand that. The start-ups in the area that the
Client wishes to venture engage in various rounds of raising capital with varied number of
investors. Each round will involve typically its own conditions and terms with a shareholding
agreement which will be overriding and binding these terms. This business structure would be
that of corporation. The terms would include typically the share types which the business has
issued; the entity that the shareholder owns the shares of; clause of right of first refusal;
preference right and anti-dilution. It will be complex with their being a legally binding
agreement to change the business structure without having any affect on the shareholders rights.

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Before any change is made every shareholder would need to agree and the Client would not be
the sole authority. However there exists both advantages and disadvantages for opting for a
particular structure. Before analyzing the best option for the client it is essential to look at the
main type of business structure in this business area. Analysis of the market which are involved
with tech startups indicate that there is more inclination towards the business structure of
corporation as there is no personal liability, the most important part is that the intellectual
property involved is protected and it's easier to raise funds and expand. However given the
Client’s situations there are other business structure that should also be considered:
Sole Trader, this is the least expensive and simplest option that is available which is the primary
reason why it is preferred by start-ups in general. It is designed for owners of business who
are their companies sole proprietors. There is however, not much protection that is provided by
this structure in case there anything that goes wrong. The personal assets of the owner of the
business is unprotected from the claims that arises from the business.
Incorporation, this makes the business effectively a separate entity from the owner of the
business. There is quite a lot of paperwork that is involved in this structure and can be expensive
for maintaining however, what it offers is protection of the personal assets from the liabilities of
the company. It is only the assets of the company that will be at risk.
Partnership, this business structure is preferred by start-ups which are starting business with
multiple people as it allows a business with different people together and income sharing. As
compared to companies partnerships are less expensive and easier to set up. All partners are
however, together responsible personally for all the actions and business debts of the partnership.
There is also individual liability on each of partners for the debts which have been incurred by

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other partnership due to the fiduciary relationship that exists between the partners. A fiduciary
relationship exists between the partners of a firm, when one of the partners of the firms is acting
as the firm’s agent such partner shall owe a duty towards the other partners and similarly there
will be a duty that is owed by the other partners towards such partner as held in the case of
Phillips-Higgins v Harper (Phillips-Higgins v Harper, 1954) . Thus unlike the structure of a
company there is unlimited liability.
Part II: Report on Business Structure Suitable for Client
It is advisable given the fact that the client wants to control the marketing and roll out of
his business it is advisable that he starts his business as a sole trader. This business structure will
ensure that during the start of his business there is maximum control that the client has ("Sole
trader", 2016). It will also be relatively less expensive and when later if the Client is of the
opinion that he wants to change the structure of the business he can do so without any
obstruction. It is essential that at the start the Client should have a structure that is robust and
also flexible so as to be able support the growth of the business.
Sole Trader as advisable Business Structure to Start
Advantages of a Sole Trader
The main advantages of sole trader that is essential for the Client is that first it will be
simple and inexpensive for setting up and maintenance will also be easy. Second and most
important the Client will have Complete Control over the direction and management of the
business (Kessler & Leong, 2009). Third all the assets and profits of the business will be owned
by the Client. Fourth as compared to the other business structures the paperwork is the least.
Fifth there are minimal government regulations and statutory provisions which will govern the
Client in the manner of operation of the business. Sixth as required for companies it is not

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required to make the profits public. Seventh running tax wise is simpler as the taxing of profits
are at the rate of personal tax. Eighth the retained earning which complicates tax is not there and
Ninth it is relatively easy to disband after tax gains can be kept after selling the business
(Quilter, 2010).
Disadvantages of a Sole Trader
There are however various disadvantages that exist when it comes to sole trading. The
first being of complete liability, the Client would be liable personally for all the debts of the
business and there is risk to the personal assets if the debts are not paid (Business, 2015). Most
essential in the Client’s situation is that even his intellectual property for the software will be at
risk. Secondly though the tax on profits are paid at the Client’s marginal tax rate, there is a
chance that this may become more than the company rate of tax (Gillies, 2010). Thirdly there
may be a requirement for keeping aside capital for the payment of tax or there might be cash
flow deficiency at the time of payment of tax. Fourthly there are few concessions with respect to
tax that are available. The opportunities of expansion are limited with this type of business
structure.
Corporation as the Eventual Business Structure
Given the disadvantages it is advisable that though as a start up the best possible business
structure would be that of a Sole Proprietorship given the fact that he needs to control the rolling
out of the business and marketing (Graw, Parker, Whitford, Sangkuhl & Do, 2016). However, in
the long run it is advisable that he opts for the business structure of corporation to avoid risk to
his personal assets specially to his intellectual property rights as and when his company starts
growing (Adams, 2015). It is not advisable to stick to the structure of Sole Trader if he wants to
expand the business.

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Advantages of a Corporation
The advantages of a corporation is that first and most important, a corporation is a
separate legal entity and thus there is limited liability. A universal recognition was given in the
Salmon’s case to the principle of separate legal entity of a company (Salomon v Salomon & Co
Ltd, 1896). This was a landmark case which went on to establish that once a company has been
incorporated it forms an artificial person . The Corporations Act 2011 under Sec 119 states that
‘a company may sue or be sued on its own name’. Secondly there is ability as a startup to take
advantages of various grants and tax incentives by the Commonwealth and the State government
which will be beneficial for the growth of the company. Thirdly this structure also helps in
bringing on board more investors as it appeals the most to them. There are different methods by
which this can be done which includes with the funder through direct loan arrangement or
issuance of shares to the investors in return of capital (Cahill, 2014). As arrangements become
more established various other options become available as well (Herzberg, Lipton & Von
Nessen, 2007). Fourthly though at the moment it is not likely that the Client would require to
hire employees however as the business grow there will be a requirement of taking on directly
the staff for supplementing of the workforce. The company structure allows this to happen in a
seamless manner without their being an increase in the legal exposure of the Client to an
increased financial and such other types of obligations which are associated with the
employment of workforce.
As discussed the most important element of considering incorporation of company
eventually would be protection of the Intellectual Property of the Client. Since the basis of the
business of the Client and the core is his valuable Intellectual Property over the software that he
has developed. This IP in the earlier stages will be developed usually in a structure which would

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then become an entity for trading. The protection of this IP would be by a patent or other such
rights like a copyright, but there also needs to a protection that is guaranteed to it from the
operating and trading risks that will arise, when the business starts to deal with the world at
large. This is achieved usually by having the IP in a structure that is separate from the trading
entity. The entity of the IP will then license the use of this IP to the entity that is trading thus
protecting this IP from the risks of trading and operation (Latimer, 2016).
Disadvantages of a Corporation
It is because there are certain cons which are there in the incorporation of the company
which is why it is advisable to first start the business a Sole Trader. The cons that affect the
Client the most would be first it would take a lot of effort to set up and the cost of setting up
would be much higher. The most important con of incorporation of company at the very outset
is that the Client would loose complete control of the company and every decision taken would
have to be taken only with the consent of the shareholders.

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Reference
Adams, M. (2015). Business organisations law guidebook. Oxford University Press.
Business, H. (2015). How to Choose the Best Legal Structure for Your Business. Business
News Daily. Retrieved 22 August 2017, from http://www.businessnewsdaily.com/8163-
choose-legal-business-structure.html
Cahill, G. (2014). Effective Structuring – Protecting Your Assets. http://www.cgw.com.au.
Retrieved 22 August 2017, from
http://www.cgw.com.au/wp-content/uploads/2015/07/Effective-structuring-protecting-
your-assets-Greg-Cahill-July-2014.pdf
Gillies, P. (2010). Business law. Sydney: Federation Press.
Graw, S., Parker, D., Whitford, K., Sangkuhl, E., & Do, C. (2016). Understanding business
law (8th ed.). Lexisnexis Butterworths Australia.
Herzberg, A., Lipton, P., & Von Nessen, P. (2007). Essential corporations legislation.
Pyrmont, NSW: Lawbook Co.
Kessler, M., & Leong, O. (2009). Becoming a sole trader. Potts Point, N.S.W.: NAVA.
Latimer, P. (2016). Australian business law (35th ed.). Oxford University Press Australia.
Phillips-Higgins v Harper, 2 All ER 51 (1954).
Quilter, M. (2010). The company law notes. Pyrmont, NSW.: Lawbook Co.
Salomon v Salomon & Co Ltd., UKHL 1. (1896).

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Sole trader. (2016). Business.gov.au. Retrieved 22 August 2017, from
https://www.business.gov.au/info/plan-and-start/start-your-business/business-
structure/business-structures-and-types/sole-trader