What are business structures and why do you need to know about them? So when people start trading, you’ve got the option of just simply picking out your shingle, starting to run your business, and basically you are your business. Now there are some downsides to that.
One of the downsides is that, if your business does not do very well, and it fails, your business debts are actually your personal debts, and that is a way that you risk losing your personal assets. If you owe somebody else business debts, they can actually sue you for them, and they will be able to take your personal property. The law doesn’t differentiate between you and your business, if the business owes money, somebody can come after you personally. So that could be things like your car, your house, so it could be quite devastating.
So most people suggest that instead of running things that way, you put into place a legal structure or a business structure, that gives you some protection, it isolates you from the business debt. So if your business goes under, you are still protected, and they can’t take your assets. The most simple way of doing it is by having a company, if you have a company you need to understand that there are certain obligations associated with having a company, and how a company works is that you have one or more directors and they run things and are in charge of what happens in the company, and then you have one or more shareholders and they get the profits.
So you could be a director without being a shareholder, you could be a shareholder without being a director. Sometimes, depending on how the company’s constitution, which is the founding document, depending on how that is worded, the shareholders sometimes have certain power over the directors. Now the directors are responsible for what happens in the business, so although you’re creating a company to isolate yourself and insulate yourself from debt, if you are a director of a company, and you do certain things, you will be personally liable.
So for example, if you don’t pay the proper employee tax or superannuation required here in Australia, then you would be personally liable for that. The company goes bankrupt,
it doesn’t matter, you still have to pay that as the director, so that’s the guy who runs the show, not necessarily the guy who gets the money. There are various government websites and some really good guidebooks on director’s duties and obligations, I will link below so that you can get one of those.
So the other obligations are things like, you can’t treat the company money as your personal money, you can only pay company expenses with the company money, and then you have to take the money out of the company in certain ways. For example paying yourself a salary,
or a contractor’s fee, all those finer points are something that you should run by a tax accountant because the accountant is the one who understands and has all the knowledge on how that whole process works. So a lot of accountants recommend that rather than simply having a company, what you do is you have a company and then the company is the trustee of a trust, and then the trust runs the business. I find it a little bit complicated and whether you should have just a company, or a trust and a company, is something again to talk to the accountant about, because they know and understand about tax implications. I am not a tax expert, I don’t like tax at all, and I know the minimum about it, so I cannot advise you about tax, but I can advise you that the tax accountant is the best person to speak to.
When you’re talking to them, the things you need to think about is the ease at which you can sell the business, how far into the business are you, such as are you sort of towards the end of your working life and you only want to work on it for ten years and then you want to sell it, is it something that your family might take over later, and the answer to these questions will give the accountant the guidance as to what you should be doing. Personally, I certainly see too many small businesses having a complicated structure, the more complicated the structure the more difficult for them to operate, it’s just more administrative hassle.
So if you’re a solo person and you’re running the business on your own, you don’t have staff and you don’t have resources, a company I feel is a good idea. I’m subject to what the accountant says on tax, because it’s less complicated than having the trust and the company together, but there might be very good reasons why a trust and a company is good for you, so talk to the accountant for that point. Personally I like companies because they’re simple, then the other main type of business structure is a joint venture and a partnership.
Now, a partnership is where two or more people work together for a common business goal, and a lot of people talk about partnership very loosely, they’ll say I’m partnering with someone, when what they actually mean is collaboration. A partnership has got a specific legal meaning and what it means is that you’re running a joint business, and as such your partner can, without your consent incur business debts for which you are fully liable. I recommend avoiding partnerships, unless you’re in an industry that requires partnerships, which most industries have moved away from that requirement now.
When I started my own law practice, 15 years ago, at the time of writing this, you could only have a partnership. So partnerships can be tricky and they can be dangerous, and I don’t think there’s any good reason for people to go into a partnership. If you are working together with somebody on a joint business, your best option is to look at one of the corporate structures like a company, or a trading trust, or a combination. Again, talk to your accountant about which one is best for tax purposes.
So then that leaves collaboration, or also sometimes called a joint venture, which is where two individuals or businesses work together for a common business goal. This is slightly different from a partnership, a partnership is usually where there’s one business and you’re both working together for the goal of that business. A joint venture can be a partnership so gotta be careful, but generally it’s separate businesses working together for a common goal.
For example, in my business, I might collaborate with somebody who is good at recording videos. As part of the collaboration, I might give some marketing to the person who helps me. So, they help me record the videos, maybe they charge me much less than a normal client and I market their business, or they market my business. Other collaborations might be if somebody owns a venue, and somebody else is a caterer, and so they work together, or people might collaborate on a book for example.
A warning about collaborations is that very often people get so excited about working together that they don’t articulate, who has what responsibility, what are they gonna do if your fellow collaborator doesn’t do what you expect them to do. So what if you thought they were going to be putting in twenty hours a week and they only do five, how are you going to deal with that?
How are you going to deal with it if the collaboration loses money instead of makes money? Usually people pitch in 50-50 for the costs, but if you are collaborating with me for example and I’m bringing my expertise, you might bring money instead of expertise, it doesn’t have to be financial. Then what happens if it makes profit? Are you going to split it 50-50? Is it going to be a different split? How are you going to work out whether or not you need to hire staff? What is going to happen if the business does quite well, but you don’t want to work together anymore?
If you think about all of these things in advance, collaboration can work really well and you don’t need hundreds of pages of legal documents or anything like that, bullet point strategy is often a very good starting point to help you refine and it acts as a guide later on if things don’t go quite according to plan. It is really important to deal with the ownership of any assets that come out of the collaboration, so whether it’s money that comes into the business, or it might be an asset like a Facebook page for example.
If I collaborate with somebody else and we create a Facebook group, who owns the group if we split up? Can I have the group or is it your group? How do we work that out? Who owns the clients? It will save a lot of time, effort, and stress, if you plan for these things in advance, and you can’t plan for everything, but the more that you can think of in advance, the better. That’s why it’s useful to brainstorm with somebody like me who’s helped many collaborations, sometimes even just with their brainstorming people can come up with ideas that they think about, or angles that they didn’t think about, and very often they’re not actually ready to collaborate yet. Sometimes there’s a few more things that they need to sort out before they can collaborate or they might need another person to come in and help with admin or something, just to get the collaboration off the ground.
So those are the different approaches, collaboration is obviously not a business structure as such, it’s two people or two businesses working together for the benefit of each other. But it’s not one business, if it’s one business, then it’s the partnership and is where it can get sticky and tricky. It’s individual to each business, I cannot say what type of business entity you should have in your business. It depends on the tax situation which changes all the time, it depends on whether you want to own this business for a very long time, or whether you want to get out of it quite quickly. You need to think about capital gains tax and many other aspects, all i’m talking about here is the legal aspect of business structure.