Business Models

Have you ever wondered just what is the difference between a sole trader, partnership, company & not for profit?

Or perhaps it was simply, what is the best business model for my needs?!

We know it can be a little confusing – so here is some help……

There are different types of business structures in Australia; all with benefits and also disadvantages (the old pros and cons stuff!) – so deciding which one is right for you and your business is an important part of taking your initial business idea & turning it into something feasible!

Like your business idea, the structure of your business forms the foundation for how you will conduct your business (yep, the building blocks).

Factors to think about when deciding include taxation, who else is involved in the biz, personal financial liabilities (stuff you owe to others) and start up costs. These things will also affect the complexity of your chosen structure, and so you should note that the more complex the business structure the more expensive it will be to establish, but also usually it also means the more protected you are.

The most common business structures are: Sole Trader; Partnership; and Proprietary Limited Company. However also these days there are many young people setting up social enterprises under Not For Profit structures – pretty kewl!

Here is the break down…..

Sole Trader:
This structure refers to an individual conducting a business alone without a partner or partners. This is irrespective of whether you have, or will have, employees. It only refers to business ownership. Most people start off with this structure, cos it is super easy to set up, you can even do it under your own personal name.
ADVANTAGES

• easy to form

• low start up costs

• simple to run

• owner is in direct control and all profit (when you make some) goes to the owner

• it is easy to change the legal structure later

• easy to wind up (stop) if needed

• maximum privacy

• you can trade under your own name

DISADVANTAGES

• unlimited liability: you are personally liable for all biz debts (money owed to other people/businesses that the business is unable to pay)

• limited resources (cash) for growth

• hard to raise capital (get extra cash from others to invest in your business)

• the biz threatened if anything happens to the owner because you are the only one in the business

• skills base is limited to the owner

• biz income, expenses and profit are reported in your personal tax return. In the 2008-09 financial year, if you’re earning over $80 000, each dollar over $80 000 you earn will be taxed at a rate of 40 cents (40%) – that’s ten cents more than the company tax rate of 30%.

For more info check out the ATO website

Partnerships:
Establishing your biz as a partnership can overcome some of the difficulties of being a sole trader. A partnership allows a group of people to come together and contribute their time, talents, and money towards a common goal – the success of the business idea or venture. In return, they share the responsibilities and profits.

Top Tip – Produce a written partnership agreement and have all of the partners sign it! This outlines for each partner their role, their workload and contribution to the business (money contributions and other contributions) and how this relates to their equity (how much of the biz they own), responsibility, and share of profits. If a partner wants to leave, or does the dirty on you, this agreement will let you know where you both stand legally! If you decide not to have a written agreement, the law will assume each partner has an equal share in the business (which isn’t always the case).
ADVANTAGES

• easy to form: need a partnership agreement

• low start-up costs

• broader skills and capital base to use because there is more than one of you

• privacy of affairs

• limited outside regulation

• it is easy to change the legal structure later

• as a partnership is NOT taxed it provides greater flexibility for tax arrangements (partnership income is allocated to partners, to put into their personal income tax returns)

DISADVANTAGES

• partners have unlimited liability: partners are personally liable for all biz debt

• divided authority between the partners

• less flexibility in transferring ownership

• every partner is liable for the actions of the other partners (so if one partner does something dodgy then all of the partners are affected and considered liable/responsible)

Limited Partnership:
The NSW Partnership Act has provided the option of a limited liability partnership structure where the liability of a partner contributing capital is limited by the amount of this capital contribution. This is only permitted with ’silent partners’ who do not have a hands on role or other management say within the business. If you are not in NSW but would like this business structure, check with your State trading department to see if this clause is available.

For more info on partnerships, click here.

Proprietary Limited Company: (Pty Ltd)
Choosing to take the structure of a private company is not the most common choice for a new business due to its complex structure and costs in comparison to that of being a sole trader or partnership.

Keeping up with the regulations can take time and money for this structure, that can be too much for some small businesses. But there also are a lot of advantages to this structure too, namely tax!

ADVANTAGES

• liability of the shareholders is limited to the amount they pay for their shares

• ease of selling the ownership, you sell the shares of the business

• management can be run by board of independent experts, if you want to (this is not compulsory)

• tax advantages

• easier to attract capital (extra cash/funding from others for your business to grow)

• owners can also be employees

• company is a separate legal entity to owners/shareholders

• there are ASIC resources to assist

DISADVANTAGES

• close regulation by government and courts (this can be good and bad!)
• you have to be over 18 to be able to be a director of a company

• expensive to form and maintain

• management restricted by constitution

• regulated under Corporations Law which sets out many obligations for company and its directors: making compliance costs high

Check out the ATO website for more info on Pty Ltd sturctures!

You can contact The Australian Securities and Investments Commission for information sheets

Not for Profit

Not for profits (NFPs) can fall under either a company structure or an incorporated association. There’s a lot of pros and cons to both of these… more information is available at the ASIC website here, however just remember that associations come under state legislation so you need to check out your state’s relevant info. All state links are on the page linked just above.
ADVANTAGES

• partial or full exemption from income tax may apply

• profits stay within the organisation

• don’t need to register for GST until have income of $150 000 per year

• may receive some fringe benefits tax exemptions for employees

DISADVANTAGES

• you must have financial statements audited each year

• Potential for increased reporting requirements to members/donors, etc

Business structure is something that your accountant and lawyer can advise you about, as there are tax as well as legal considerations. This need not be an expensive exercise at all – just ask them for some free advice as a  young entrepreneur!

For more info,

Check out our forums and topics on business structure.

www.business.gov.au – Deciding on a biz structure

www.ato.gov.au – biz structure

Plus your local Business Enterprise Centre should be able to help you with some free advice.