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Choosing the structure of your business

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Old 09-07-09
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Default Choosing the structure of your business

Hi there :)

I've been in here before, gotten great advice and have literally gone back to the drawing board on a few things (a good thing).

I am at the final stages of setting up my business. It's small, home based (at present) just me operating and financing it and I've been told that everything is looking good.

There's just one 'little' issue.

The business structure.

I had thought that being a sole operator I could set up my business as a sole trader but I'm being advised to consider a company (sole proprietorship) on the basis that it would protect what assets I have (ie. my car and house) better.

On paper (I've been reading up on companies) it all looks really simple. And this makes me wonder whether I have missed anything! :)

Has anyone been in this position before? If so, what are your thoughts? What direction did you end up taking?

I'll have to make a decision on Monday so that I can basically proceed with everything else.

All comments welcome.
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Old 09-07-09
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Default Re: Choosing the structure of your business

Go and talk to your accountant. If you don't have one, find one.

Seriously, it's not as straight forward as it all looks and there's all kinds of things you need to know that, unless you've done this before or you're an expert in the area, you just don't know.

Seriously, I traded as a sole trader for 3 years before I went and saw my accountant and he's like "Leela! We need to set you up a limited unit trust ..." and I'm like WTF are you talking about?! I understand pty ltd and stuff ... but what are you talking about??

He started to explain the differences but my eyes must have glazed over because he was all like ... look, don't worry about ... here's what I'm going to do ... and set it all up for me.

A good accountant is worth their weight in gold - and if you have a relationship with them, they'll probably do that initial discussion for free ... you should then ABSOLUTELY pay them to set it all up for you.

Yes, it will cost a couple of grand.

Yes, it's an expense.

But if you lose your house and car because you tried to set your business up and did it wrong ... well, two grand will seem like a drop in the ocean.

Hell, even if you choose the wrong structure, then need to redo it in a couple of months because it's all over the shop ... some things you should NOT try and do yourself ... just leave it to the pros ...
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Old 09-07-09
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Default Re: Choosing the structure of your business

I was going to say the same thing that Leela said - she beat me to it.

I often get asked for advice in my own industry and I tell them the same thing. Go see their accountant. There are many things that have to be considered that only their accountant could be privy to and there is no 'one size fits all'.
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Old 09-07-09
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Default Re: Choosing the structure of your business

I have an accountant but I wasn't after an appraisal or comparison.

I just wanted to get some thoughts and musings from others that have been there and done that.

It doesn't mean I'll rush out and do the same thing or that I'll automatically figure that what you've done I must do. Putting questions out there is just another way to touch base with like minds, that's all.

Thanks.
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Old 10-07-09
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Default Re: Choosing the structure of your business

I traded as a sole trader for a number of years (not my current business) and only incorporated when I wanted to publish a controversial article and was being threatened with legal action.

So for me it was about risk. When I felt that my assets (or more importantly, my partners assets) mights be at risk, it was time to incorporate. Having a company structure gave a legal separation between me and the company.

I run with a pty ltd company now and there are a couple of benefits such as having that separation and being able to be covered by workers comp insurance...but there is also the downside of additional compliance and not being able to always do exactly what you'd like with your money (I'm referring here to regulations around you owning the company money etc).

Hope my musings help and all the best with making your decision...
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Old 11-07-09
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Default Re: Choosing the structure of your business

Hi Shade,

The most obvious positive item about incorporating is the separation of personal assets. Unless you provide a personal guarantee to a creditor, all of your personal assets are generally safe from any possible liquidation, litigation etc.

If you have a spouse that isn't working or is only part time, you can also distribute earnings to assist with tax reduction.

As everyone has said, talk to an Accountant who can walk you through how, why and more importantly, if, you should incorporate.

I set up my own Pty Ltd Company online through a local Adelaide company and it was only about $700.

Good luck with it!
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Old 13-07-09
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Default Re: Choosing the structure of your business

Quote:
Unless you provide a personal guarantee to a creditor, all of your personal assets are generally safe from any possible liquidation, litigation etc.
Yes, that's what I thought.
Until my accountant set me straight :)
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Thanks for your musings, Fiona. I'll admit sole trading seems the easiest option for me at this time because I've yet to establish myself in the marketplace and I don't want to go all out and set up all the peripheries only to have it fall flat.

Although I'm not thinking this way! But it pays to be realistic and to plan for things that might happen.
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Old 07-08-09
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Default Re: Choosing the structure of your business

Just to add more food for thought

To further decide which struvture is best for you:

Type of Industry your in?
Does your partner work?
Have you got children over 18 on low income?
Type of work you do?
Can insurances in your personal name be sufficient?
Tax & admin compliance required, and their costs, between all the entities?
Ease of using money?
Ease of taking out money?

No straight answer I'm afraid. Has to be evaluated from scratch in each scenario.

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Old 10-08-09
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Default Re: Choosing the structure of your business

Hi Shade,

I’m wondering what path you ended up choosing.

Structure is such an important aspect of any business. For others grappling with this issue, make sure you plan ahead. Capital gains tax can make it expensive to change structure once your business is profitable and has meaningful value.

This doesn’t mean you have to decide on day one – just don’t put it off until structure actually becomes an issue. Plan ahead just like you would for every other part of your business.

In my opinion, starting off as sole trader is probably fine. You’ll avoid the additional cost and compliance of a Pty Ltd company at the onset. This will also give you some time to get comfortable with the idea of running your own business. If you are feeling good about your business after a few months, and can really see yourself sticking at it, then commit to a structure.

As for asset protection, a Pty Ltd company is not an invincible shield. You can still be individually sued as a director. However, I’m not sure this would be your greatest concern over the next few months (depends on your line of business of course).

Most importantly seek professional advice - this is not an area to wing it. A lawyer is also going to be able to offer valuable advice.

Cheers

Jason
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