When starting a business the first thing that needs to be considered is the structure, whether the business is a sole trader, company or partnership. The decision ultimately depends upon the type of business, where the business is headed, personal circumstances and whether it’s a small or large enterprise.
Each business structure has pros and cons, but which is more complicated out of the three and what best suits each business are regularly asked questions, which are important to know. Traditionally setting up these types of businesses was handled by an accountant or lawyer, however through online services like Honcho, all business matters are taken care of through special online tools that manage everything from one site.
Sole traders have the highest entry rate than any other structure, making up over 550,000 businesses in Australia. With this structure it is easy to change into a company or partnership at any time if the business expands or diversifies. For founders who own their own business and identify as a sole trader the biggest advantage is being your own boss, setting your own hours and of course not having to answer to anyone is always a major plus. In terms of setting up as a sole trader the entire process is easy and cheap.
While sole traders are the most popular among companies and partnerships, there are some cons, the main one being as a founder you have a high level of responsibility. There is no distinction between the founder and the business, making the founder personally liable for debts, for example if the business falls into financial hardship, personal assets such as homes or cars must be used to pay off any debts. Of course looking on the bright side all profits go straight into the founders pocket, making this type of business inviting for first time founders.
When first starting a business it is likely that founders choose to be a sole trader. It is also common for founders to for example set themselves up as a sole trader, using Honcho’s online service and then later down the track they can incorporate as a Pty Ltd company, so their personal assets are protected in the event of bankruptcy.
When starting up a business with a partner, cofounders generally look towards the partnership business structure, which is again easier and cheaper to set up than a company. The advantages of working in a partnership is resources and knowledge are combined, and for businesses that have different and varying levels of technology, services and products two brains is always better than one. Depending on the partnership agreement, losses and profits are shared and greater flexibility for holidays, sick leave and hours can be discussed and agreed upon. Everything is shared, whether that be income or stress and the burden of carrying a whole business on your shoulders is alleviated.
With partnerships having a 14 percent higher success rate than sole trader, this structure does seem to give businesses an edge. However in saying this not all partners work well together, and just like a marital relationship, business relationships have their strengths and weaknesses. For any debts incurred by the business each partner is individually liable, even if they were not responsible. Income tax is also charged at the personal tax rate and all partners have the right to participate in the management of the business, which can be tricky if both partners take on high leadership roles. To avoid being liable for any penalties the business occurs a written agreement between both cofounders can be drafted to prevent people who aren’t responsible for paying for damages.
To become a partnership, like a sole trader setting up is inexpensive. Founders can apply to become either a sole trader or partnership online through Honcho. The process is simple, either apply for a sole trader or partnership ABN and a business name. A partnership is also required to have it’s own TFN number, which can be applied for on the ABN form.
Finally out of all the business structures starting a company is the most complicated one and requires the most paperwork and legal protection. A company separates legal existence from its owners, therefore the company has its own name, taxes and incurs its own debt, like a sole trader or partner would do. Due to the complicated structure of a company, this structure is usually incorporated after people have been a sole trader or in a partnership for quite some time.
Companies are usually formed as people want to protect their assets and no longer want to be reliable for paying off debts or bankruptcy themselves. The advantages of being a company include; limited liability to shareholders, ability to raise capital, more favourable tax rates and easy ability to transfer ownership, which can be done by selling shares.
With a more complicated structure, while there is less personal responsibility, there is however higher cost. A company is expensive to set up, has more regulatory requirements and profits distributed to shareholders are taxable. With businesses that have a high start up cost however the option of being a company is favourable when taking into consideration liability and leadership.
To set up a business everything can be started with Honcho, and while these processes are longer and more complex than setting up as a sole trader or partnership, a company, especially in Australia has the highest potential to do well. Starting a company requires a Australian Company Name (ACN), and in order to get this an application for a ACN registration must be lodged. Additionally companies also need to apply for a TFN and ABN.
Before setting up a business each structure should be considered to determine the best possible outcome for the entity. Whilst in Australia companies are the most successful business types, nearly all of these first start out as either sole traders or partnerships. When starting or asking for advice online services like Honcho bundle everything into the one place, enabling entities to choose their business structure and register instantly.
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