Starting a new business is an exciting time in your life, you've had a great idea and you want to release it to the world.
Whether it's a little home based business, a new online venture, or a retail shop, you'll need decide what kind of business structure you will have, whether it's a sole trader, partnership or limited liability company.
Below are details about each entity to help you with your decision.
Sole Trader This is the most common type of entity for a single person who is starting a small business, with a low turnover and few assets.
It's a good place to start as you don't need to worry about company incorporation and the legal requirements of that.
However it does not protect your personal assets from claims generated against your business.
A sole trader is personally liable for all debts and taxes as well as benefitting from all profits.
Sole traders can employ other people to help them run their business.
A sole trader is the person who owns the business, controls all aspects and manages the day to day running.
Partnership A partnership is two or more people who run a business together.
Partnerships are usually formed by a legal partnership agreement to outline each partners responsibilities, these are generally shared control and management of the business, shared profits and shared responsibility for debts and liabilities.
If you are going into business with another person it is recommended that you both seek independent legal advice from a law firm who will assist you in ensuring the partnership is fair, legal, and robust.
A standard partnership leaves your personal assets exposed as with a sole trader.
Profits are generally shared as per the partnership agreement and each partner is then responsible for their own tax obligations.
Limited Partnerships Similar to limited liability company's, limited partnerships exist as a legal entity in its own right, and is registered with the company's office.
It is separate from its partners and offers protection for your personal assets.
A limited partnership is similar to a limited liability company is that it requires a legal name, registered office, address for service, and other contact details, however you will also need a partnership agreement that complies with the Limited Partnership Act.
Your law firm will be able to assist you with this.
Company Incorporating a company is the legal creation of the entity in its own right, separate from the owner/s and shareholder/s.
The benefits of having a limited liability company are that the company owns the assets and liabilities and is responsible for any debts, unless you have been obligated to provide a personal guarantee.
Generally a personal guarantee is required when the company is new, has few assets, or is seeking a loan that may be risky to the lender.
If no personal guarantees are in place and the company is no longer able to trade profitably the shareholders liability for losses is limited to their share of the ownership of the company.
Directors need to be aware of their obligations and your lawyer will be able to offer guidance on this.
Legal actions against Directors of failed companies are an increasing trend.