Choosing the right structure
There are four primary options for structuring your new business; you can choose to operate as a Sole Trader, Partnership, Company or a Trust. The best fit for your business depends on your specific situation, preferences and the nature of your business. Each option has advantages and disadvantages.
| Sole Trader | Partnership | Company | Trust | |
|---|---|---|---|---|
| Set up | No formal structure required. | Most operate under a legal partnership agreement. | A separate legal entity, set up under the Companies Act. | A separate legal entity, set up by a trust deed. |
| Ownership | You own the business and have complete control. | Partners share ownership and control. | The company is owned by one or more shareholders, who appoint directors. | Assets are held and managed by the trustees on behalf of beneficiaries. |
| Tax | You pay personal income tax on profits at your own tax rate. Losses can be set off against other personal income. | Each partner pays personal income tax on their share of profit at their own tax rate. Losses can be set off against other personal income. | A company currently pays tax on company profits at 30%. Profit can be distributed to shareholders as dividends, but losses can’t usually be transferred. | Currently a trust can pay tax at 30% and/or make before or after tax distributions to beneficiaries. Losses can’t be transferred to others. |
| Risk | You are personally liable for all business debts and tax. | You are personally liable for all partnership debts and tax. | Usually limited to the assets of the company. | Usually limited to assets held within the trust. |
| Main advantages | Easy to set up. Less compliance. | You share the responsibility. | Limited liability. May be easier to raise funds. | Limited liability. Potential for distributing income. |
| Main disadvantages | You have a personal liability. It may be harder to raise money. | You have personal liability. There is potential for upsets in the partnership. | More compliance. Higher set up costs. | More compliance. Higher set up costs. |
If you haven’t taken professional advice yet, now is certainly the time to do it because your choice of structure has legal, tax and other implications for you and your business.
