I love working with others - collaborate with me

How to choose the right business structure – my top 5 tips

When considering taking the plunge and starting your own business, it’s really important that you consider how the business will be set up. Making this decision first will allow for consistent business decision making into the future. Here are my top 5 tips to help you consider your options

 Tip 1 – Everybody is Different

Just like in life, every business is different. They face different risks and different financial situations. Just because someone you know has a certain structure, doesn’t mean that that is what’s best for you at this point in time. Of course, your business will change and develop over time, so the structure you adopt now can be changed in the future to suit the situation.

Some things that you should think about will include whether you are looking for any investors  in the future, what levels of funding you expect that you will need in your business. Also, think about whether the business will own assets and what they are and also what liabilities or expenses you might be exposed to.

There are personal considerations that are relevant as well, such as whether you want to be using the income to live from and the tax implications for different structures.

Finally, you need to understand the level of risk that your business is exposed to and what level of comfort you are happy with.

Tip 2 – Talk to Your Accountant

Business structures are not independent from your personal finances. Different structures have different impacts on your personal assets and your tax position. So you should certainly talk to your accountant when deciding what business structure suits you.

Tip 3 – Sole Trader vs. Company

The main difference of having a structure of a sole trader versus a company, is the different legal protection you can gain. As a sole trader, your personal assets are exposed to anything that happens in your business. This means that if you were open to a lawsuit or face any type of fines, there is no separation of your personal assets. So if you don’t have enough money in your business bank account to pay for litigation or to pay a fine, then your personal assets can be called on to pay those debts.

A company structure is opposite to this.  A company is a legal entity separate from the owners and Directors of the company  This means that if a company is sued or fined and there’s not enough money, the company can be wound up in insolvency, but the personal assets of the owners are not necessarily exposed. There is one situation that the personal assets might be exposed and that is if the Director has given some sort of personal guarantee or signed a document that personally, they will pay for anything that the company can’t pay.

Tip 4 – Partnership, Company or Joint Venture

When entering into business with another person, there are different structures that you can use.

  • A partnership is based on a contract between you and it’s basically the same as being two sole traders working together. Partnership assets aren’t separate from the personal assets of each partner.
  • In a company, it works the same as if there is a sole person in the company and the personal assets of the people involved in the company are legally separate to the individuals involved.
  • A joint venture is often used when two people come together for a joint project in a contract arrangement. A joint venture doesn’t go as far as a partnership – in that there are clear boundaries between what each person contributes and what return is given. A partnership is two people coming together to carry on one business. Where as a joint venture is used in situations more where there are two separate businesses that come together for one project.

Tip 5 – Alternatives to Reduce Risks

If you decide that a company is not for you, it is still a viable option to work as a sole trader, even though you have that additional risk that your personal assets are exposed. In order to minimise risk to your personal finances, you can consider insurances, having really strong contracts and terms, and you can make decisions about what work you do and don’t take on..

So, there are numerous options available for different structures. But ultimately it is a personal decision dependant on your situation at the time. You should definitely seek appropriate advice from a lawyer and an accountant to make the decision.

Leave a Comment