A business can be structured in many ways, depending on the goals of the business founder. When starting a new business it is important to consider which structure will be most appropriate, as each option offers positives and negatives. It is highly advisable to seek advice from a professional business coach, lawyer or accountant when starting a new business, as they can guide you towards the best solution for your business.
What are the most common business structures?
- Sole Trader: A sole trader business structure consists of only one person who is entirely legally responsible for the business and its decisions. This includes any losses the business may make and any debts it may incur. A sole trader business is the simplest business structure available in Australia. Sole traders can still employ people to help them, but they are responsible for all decisions made when starting and running their business.
- Partnership: A partnership is similar to a sole trader business, but involves multiple people running the business together. A partnership can be formed between up to 20 people and there are multiple options available depending on the nature of the business and how much control each partner is intended to have.
- Company: Unlike a sole trader business or partnership, establishing a company creates a separate legal entity. The company gains the same rights as an individual and can separately incur debts, sue other people or companies, and be sued itself. Company owners limit their personal liability so that they are not liable for company debts. Starting a company is more difficult than setting up a sole trader business or partnership, as it has a more complicated registration process and additional reporting requirements.
- Trust: A trust is set up to serve its beneficiaries by holding property or assets. The trustee who holds these assets is obliged to manage them on behalf of the beneficiaries and protect their interests.
Can you change business structure?
Yes, and businesses often do, for reasons including:
- Change in management - for example, if you are running a sole trader business and you decide to bring in another person, you may choose to change to a partnership (or vice versa).
- Change in ownership - when a business is bought or sold, the new owner might choose to change the business structure to better serve their purposes.
- Financial reasons - whether it is to protect the business owner from exposure to business debts or liabilities, or simply to improve cashflow and profitability, businesses often change structure to improve their financial position.
- Operational reasons - when a company reorganises itself to start new processes or improve existing ones, it is sometimes necessary to add or remove business entities or change the overall business structure.
- Business growth - if a business is taking on new people or is expanding to a new country, it is often necessary to change or adapt the business structure to accommodate the growth.
- Downsizing - when there is an economic downturn or when a business wants to simplify its structure, it may choose to downsize from a company to a partnership or sole trader business.