Over the last month I’ve been doing a bunch of research into business structures and the various advantages and disadvantages of different structures.
Here is a very quick rundown of what I have learned.
Disclaimer #1: I am not a lawyer. All of this is based on my reading and is my understanding. Please do your own research and/or speak to a qualified professional before making any decisions about forming a business.
Disclaimer #2: I am more than happy to be corrected on any of the information below. As I said, I’m learning this, so will likely make a couple of mistakes. Happy to have a discussion any time.
Different business structures:
Partnership
Advantages:
- Simple to set up
- Simple to maintain
- Simple to dissolve
- Shared control within a group
Disadvantages:
- All members liable for costs (if in debt, all members can be sued)
- Minimal legal protection
- Partnership is not a legal entity. Cannot sign contracts.
- IP is owned by individual members.
A partnership is a structure made up of a group of individuals who carry out business together.
It is a relatively simple structure to set up and to register. It doesn’t require any particular compliance reporting or official documentation beyond registering with ASIC (Australian Securities and Investments Commission).
However, all members of a partnership can be held liable for any debts that the partnership accrues and each member of the partnership remains a separate legal entity. For this reason, entering into contracts or agreements can be more difficult.
Company
Advantages:
- A separate legal entity – can enter contracts
- Limited liability – shareholders are not liable for debts incurred by the company
- IP is owned by the company rather than individuals.
Disadvantages:
- A more complex structure to set up and to run
- Higher set up and running costs
- Requires filling certain specific roles.
While a company is a more complex structure to set up and maintain, the advantages of being able to act as a separate legal entity and the legal protections afforded by the structure mean that it is usually the better option for starting a business. A company offers legal protection to owners and can also act as an entity that is able to enter into contracts. A company needs to prepare annual financial reports, and there are a number of reports, such as a shareholder register and meeting minutes, that need to be kept up-to-date and be available to view by shareholders.
Within a company there are a number of roles that must be filled.
Shareholders or Members: These are the owners of the company. They may have a financial stake in the company, and will earn a share of the companies profits. In the event that the business becomes insolvent, shareholders’ liability is limited to the value of their share in the company.
Director: This is the person who is charged with the day to day operation of the business. They are appointed by the shareholders. There must be at least one director. The director(s) are responsible for ensuring that the company operates within the law, keeps up-to-date records and prepares financial statements as required. In the event that the company operates while insolvent (ie, has debts that it cannot pay off) then the directors can be held liable for any outstanding debts. This means that a director can be sued for their own assets, outside of their stake in the business.
There are also some restrictions on who can be a director. You must be over 18 years old, and not be or have been bankrupt or convicted of certain charges such as fraud.
Check out business.gov.au for some really great, entry level information. While I have been speaking with professionals, I spent a lot of time reading through info on this site before making contact. It was super helpful in getting me up to speed and making me feel more confident in speaking with people about what we needed.