The First Step to Setting Up A New Business

The First Step to Setting Up a New Business

So, you and a friend have come up with a great idea a new business, made some notes on the back of a napkin, and a re now ready to let the magic happen. So, what’s the next step?

You need to get your business structure right before diving in. Here, we give you some ideas on the different structures you might want to consider before choosing the wine list and opening your doors.

Sole trader/proprietor

A sole trader is an individual who conducts heir business in their personal capacity. They are legally and financially responsible for all aspects of the business.

Upside:

• It’s the simplest and easiest business structure to set up.
• There’s comparatively very little paperwork and ongoing expense.

Downside:

• You will be personally liable for all of the financial and legal decisions. If things go wrong, your personal assets and credit rating could be at risk.
• Getting finance depends on your personal credit rating.

Partnership

A partnership is a collection of individuals (up to 20) who take collective legal and financial responsibility for the conduct of a business in their personal capacity.

Upside:

• It’s relatively simple compared to companies and trusts. 
• Ongoing expenses and any risks are usually spread across the partners.
• It can be easier to get finance by using collective resources as collateral.
• There’s comparatively little ongoing paperwork.

Downside:

• Partners have personal responsibility for the business’s financial and legal liabilities. 
• It’s not easy to disentangle – partner disagreements can mean the end of the business and can sometimes end up in Court.

Company

A company is a separate entity to you that has its own legal personality. The company can enter into loans and contacts in its own right and it can sue or be sued.

The structure of companies require at least one shareholders, who own a stake in the business, and at least one director who runs the business.

If you set up a company, your personal assets (along with the assets of the shareholders) are separated from the assets of the company. Those assets usually can’t be used to pay the debts of the company, if things go wrong. With that said, company directors have a number of legal obligations (called director’s duties) to a company to make sure that it is run properly. If a director breaches those duties, they could be held personally responsible for the company’s debts.

Companies can be structured in numerous ways to fit the needs of your business. A company can be set up with its own specific constitution or you can consider shareholder or other agreements to deal with how capital is raised by the company and how the directors and shareholder’s obligations will be managed.

Upside:

• Assets are separate to those of the business owners. 
• Flexibility. The structure of the company can be tailored to suit your arrangements and individuals may come and go from a business and the company can usually continue undisturbed.

Downside:

• It’s time-consuming to set up. 
• There are ongoing administrative costs and annual reporting obligations.
• There are more robust regulatory requirements.
• Directors have “director’s duties”, which, if breached, can lead to serious personal and financial consequences.

Trusts

A trust is a legal relationship, which creates a binding obligation on an individual (a trustee) to maintain property or assets, such as the assets of a business, for the benefit of others (beneficiaries or unitholders). There are different types of trusts that can sometimes be used to hold business assets.

Trusts can be set up in different ways, depending on your needs and preferences. For example, trusts can be structured as either discretionary trusts, where the trustee has absolute discretion over income distribution, or unit trusts, where the trustee maintains the assets for the benefit of unitholders in proportion to the number of units held.

Trusts can work for some businesses, but they can sometimes be expensive and complex to establish and maintain. If you think that a trust may be right for your business, you should seek advice.

Important Note…

No matter what structure you are considering, it’s important to get independent individual legal and tax advice so you can choose the right structure for you. It’s best to consider these issues at the outset, to seek to avoid the prospect of problems arising later on.

Please note this is generalised advice. If you want to find out more about the different business structures available, contact Gordon Legal (03) 9603 3000.