ARTICLE - Going into a small business

When establishing or purchasing a small business, a business owner will need to decide upon the most appropriate structure. These are; a sole trader, partnership, company and trust. Whatever the final structure, the decision will need to be made after taking many factors into account:

• the type of business
• the projected income
• whether assets of substantial value are involved
• the need to define rights and obligations of the proprietors of the business
• taxation implications and legal and accounting requirements.

Sole trader
A sole trader may have employees. The advantage of this type of structure is that it is simple to establish and control, without the need for any formal documentation. However, a sole trader is personally liable for all debts and the proprietor’s personal assets can be exposed. Income splitting opportunities are not available to a sole trader.

Partnership
Up to 20 people may form a business partnership. It is desirable to have a written partnership agreement, outlining the rights and obligations of each partner. The partners are jointly and severally liable for the debts of the business. The term “joint and several” means that all partners are liable for the debtors of the partnership together, as well as individually. Admission and retirement of partners can give rise to stamp duty and capital gains tax implications.

Company
A company is a separate legal entity, in its own right. Most companies have “limited liability”, which means that shareholders are protected against liability of any of the debts of the company. Directors are generally protected from personal liability, but this protection can only be available if they exercise due diligence, honesty and without negligence.

However, most financial institutions and larger trade creditors will require personal guarantees from the directors. Companies can be expensive to establish and maintain, and the directors need to be aware of their duties and responsibilities under the Corporations Law. A company structure allows for flexibility in tax and other arrangements.

Trusts
Under a trust, a trustee holds assets and receives income on behalf of the beneficiaries of the trust. Trusts can take several different forms, such as a Discretionary Trust or a Unit Trust. Professional legal and accounting advice should be obtained when contemplating setting up a trust.

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Contact Kerrisons if you are thinking about setting up a small business: Phone 02 4655 7066 or email us today.