Starting a Business & Business Strctures
What Do I Need to Know About Starting a Business?
When starting a business, a person should have regard to the legal nature and costs involved. Typically, there are two options which people will choose to follow. The first is becoming a sole-trader to sell their services or goods, whereby they operate independently. Alternatively, the second option is to create a company, which separates liability and assets from the individual. Both business structures have their advantages and disadvantages. As a result, before pursuing your dream of running a business, you should get professional advice about how best to proceed.
The purpose of this article will be to give you a brief overview. This article should not be relied upon to create a business. We recommend that you seek independent legal advice about the best option for you.
On the positive side, starting a business as a sole trader with an ABN involves minimal cost and little assistance to begin with. It’s relatively quick and simple to get established and start trading. From a ‘red tape’ perspective, there is less paperwork as all your income and expenses are reported in your name.
The downside is asset protection (or lack thereof) and very few options to do with tax planning. Being a sole trade is generally at the bottom of the list; meaning that you are more likely to lose your assets in the event of owing creditors money, or running debt.
The alternative option to sole trading is a company. Instead of creating a company, people will often refer to the term as ‘incorporating’. People incorporate companies to take advantage of limited liability, meaning that directors do not have liability to third parties except in limited circumstances. As an example, were the business to fail, a sole trader may end up bankrupt, whereas, the directors of a company would be able to hand over the keys and walk away.
In practice, limiting liability is not as simple as it is seen on paper. These days, there are many ways to pierce or lift the “corporate veil”. This is a term which refers to holding people personally liable for the actions of the company. Directors can be personally liable to the taxman for unpaid PAYG and superannuation, which can be the subject of a Director Penalty Notice. If a company can not pay its debts, and is placed into liquidation, directors can be investigated. In certain circumstanced, directors can even be sued for insolvent trading, uncommercial transactions and unreasonable director-related transactions. If you’ve borrowed money from the company and not paid it back, it’s a debt owing to the company that a liquidator is very likely to chase.
Unlike a sole-trader, a company will usually have directors, shareholders and documents, such as a company constitution and shareholder agreements. The advantage or disadvantage in this, is that companies will be governed by these factors and directors will have limited control in how the company is run.
Companies now can operate with a sole director whereas in the past there had to be a minimum of two.
A customer who bought goods or services from the company can say that they were misled or deceived by the company. To protect the customer, Australian consumer laws give people the right to sue a director personally, in the event that the director was knowingly involved in the conduct which misled or deceived them.
It is often a requirement of banks, that directors give personal guarantees and put their homes up as security. So, the company structure may offer no protection against the bank when it comes knocking. Interestingly, many directors install their spouses in the same role, even when they have no involvement in the business and have no idea of the liability they may be exposed to (what is the purpose).
Overview of Starting a Business
In summary, the sole-trader structure is easy to operate and is well understood, however, it involves personal exposure all the time. On the other hand, a company in normal circumstances offers limited liability, but many directors are surprised at how often they end up with liability they did not plan for. In essence, you will need to know the limitations of your business structure and how to run your business effectively in respect of this.
We hope you found this article of interest. For more information please contact Benjamin Trost at firstname.lastname@example.org or phone 07 3808 7777 for a confidential discussion.