The legal structure you choose for your business can affect the ownership, tax structure, risks and future operations. For example, choosing the legal structure that best meets your needs may:

• protect you from risks that you can avoid
• help you to minimise your tax liability
• save you time and minimise paperwork
• help you avoid government regulation and unnecessary red tape.

On the other hand, if you choose the wrong legal structure, you may end up paying more tax than you need to or be overwhelmed with paperwork and government fees.

Types of business structure

A business can be legally structured in several ways. The best legal structure for a business depends on many variables including the number and relationship of the people involved in the business, the length of time the business is planning to run, expected income from the business and the activities of the business itself.

The three most common legal structures are sole trader, partnership and proprietary limited company. You can also operate your business using a trust structure.

A sole trader is an individual who runs the business solely by themselves. This is the easiest and cheapest way to structure a business. The sole trader has full control of the business including ownership of all profits and responsibility for all debts.

A partnership requires an intention to share profits and an understanding that partners act on behalf of each other in business. For example, if one partner makes a business decision without consulting the other partner, it automatically makes both partners responsible regardless. Partners are collectively responsible for all business debts and profits, and also have full control of the business.

A proprietary limited company is a more complex form of business structure. It is established under the Corporations Act 2001 (Commonwealth) which states that company directors have certain legal obligations to meet. A proprietary limited company is considered a separate entity from the person or people running the business. It has different profit distribution, tax and legal responsibilities from a sole trader or a partnership.

How to make the best choice

To make the best choice, it is recommended you consider both the advantages and disadvantages in view of your personal situation and the nature and objectives of your business (see the Advantages and disadvantages of each legal structure table). As this is a very complex task, we recommend you seek the advice of your solicitor and accountant.

Some issues that you could discuss with your advisers include:

• Will you start up as a sole trader, a partnership or a company? Find out which structure will best suit your business needs.
  
  
• Which legal structure will help you minimise your taxation liability in view of the annual net profit you expect your business to make?
  
  
• Owning a business takes a broad range of skills and personal abilities. Do you have enough knowledge, determination and experience to succeed by yourself? If not, will this affect how you structure your business?
  
  
• If you need a partner to share the costs and risks of operating your business, have you considered how much money they should invest in the business and whether they have the right kind of experience that you need?
  
  
• Starting a business with a partner requires you both to agree on the goals and the direction of the business. If you intend trading as a partnership, ensure you have a partnership agreement that gives each partner a clear understanding of their rights and responsibilities.
  
  
• Depending on gross turnover, you may need to register for an Australian Business Number (ABN) with the Australian Taxation Office.
  
  
• If you decide to register and operate as a proprietary limited company, be aware you will have responsibilities and duties as a company director. For more information, speak to your solicitor or call the Australian Securities and Investments Commission (ASIC) for a copy of their publication Your company and the law on 1300 300 630 or (07) 3867 4900.

	Sole trader	Partnership	Proprietary limited company
Advantages	Inexpensive Easy to set up by someone acting alone Few government regulations All profits to sole trader Easy to close No need to disclose information to the public	Relatively easy to start A partner brings in additional capital A partner brings more expertise Few government regulations Possible tax advantages-income splitting Shared risk No need to disclose information to the public	Limited liability Is a separate legal entity Shares are transferable Possible tax advantages Ability to control authority of shareholders through type of shares issued
Disadvantages	Unlimited liability Few tax concessions Possible lack of capital Possible limit of expertise Lack of continuity-reliant on one person only- affected by sickness, holidays, retirement, death	Unlimited liability Each partner equally and jointly responsible Possible executive management problems (who is the boss?) Lack of continuity-reliant on partners only	Government regulations (includes annual returns to ASIC) Possible tax disadvantages Responsibilities of directors Charter restrictions Public disclosure

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