March 2010

Business Ownership

Picking the right structure

When purchasing a business it is important to consider the legal structure you will use to run the business. There are many options so you need to determine which structure will most suitably meet your needs.
We can guide you through the options. We encourage clients to speak to their accountant to identify any tax implications. We will then ensure that the structure is set up to meet your particular needs. The range of options include:

1. Sole Trader

A sole trader is a person doing business in their own name or some other business name. The business is the individual, operating in a personal capacity. This may be suitable for a straightforward business, where there is no problem with liquidity.

2. Partnership

A partnership is an uncomplicated structure and is best used where there are a small number of partners who know and trust each other fully. A partnership is also not a separate legal entity. Like the sole trader, no registration is required. There is also no requirement on the partners to have a written agreement, but it is sensible to do so.

3. Joint Venture

A joint venture is different to a partnership in that the various participants are not carrying on a business in common; instead it consists of two or more entities that have pooled resources for a particular purpose, often for a limited period. Unlike a partnership, the terms of a joint venture are not governed by legislation. Therefore, the parties will need to enter into a written agreement to regulate their relationship.
“You must determine which structure will most suitably meet your needs”.

4. Trading Trust

A trading trust is any trust that carries on a business. A trust can only exist for a maximum of 80 years. As with family trusts, the trustees are personally liable and therefore a trading trust usually has a corporate (limited liability company) trustee to avoid personal liability for business debts. This structure may still leave the director/s of the company potentially liable for debts. Further, banks and landlords (amongst others) will still require personal guarantees from the individuals involved with the business.

5. Company

A company is a separate legal entity which has limited liability for shareholders and generally has the same rights and obligations of a natural person. Unlike a trading trust, a company could potentially exist forever. Incorporation and administration of a company is usually more complex than the other structures, but the level of complexity can vary from very simple in the case of a one shareholder/one director company to very complex in the case of a large publicly listed company. The company structure works well when there is more than one proprietor involved in the business. However, directors of the company need to appreciate that they may have some personal liability for debts of the company in certain circumstances and may be called upon to provide personal guarantees to the likes of banks and landlords.

Conclusions

Individual circumstances, together with appropriate legal and accounting advice, will dictate the right business ownership structure for you.