Please Note: If you are unsure about which legal structure is appropriate for your business, you will need to seek advice from your accountant or solicitor/lawyer. In deciding on your business structure you should take into consideration the requirements for reporting, and accounting methods, and taxation, that each business structure (in your country) is legally required to comply with.
You should be aware of other restrictions which may impinge on your small business, such as; trade practices, consumer laws and protection, equal opportunity, and occupational health and safety (workplace safety) requirements.
The most common types of business structures available include:
- Sole proprietor/sole trader,
- Partnerships and;
These descriptions may vary depending on the country where you operate your business, as follows:
Sometimes referred to as a sole trader, this is the most common type of all the business structures and the easiest to set-up. A single owner operator usually operates in this business structure.
Usually, in this structure, both the personal income and business income are taxable as one total amount. You can operate this type of business structure under your own name, or you can choose to register a unique trading name for the business. There is usually a cost to register a business name and the business name registration must be renewed periodically.
In this business structure, there are at least two (or more) people that operate as partners in the business. This could be because each person brings his or her own unique skill or expertise into the business. In this situation it would be best to have a trading name registered that clearly identifies what the business does.
Also you may need to have a separate Tax File number for the partnership. The tax is usually calculated on the partnership income (profit), and the individuals personal income drawn from the business.
Ideally should have a partnership agreement that clearly outlines what each person will be doing in the business and how the profits will be shared. This will save a lot of grief should the business eventually fold later on. There is a Partnership Agreement template that we have prepared for you click here to download.
Company or corporation
The company/corporation set-up is by far the most regulated of all the business structures. In some countries this set-up means that your compliance, business reporting, and taxation reporting must be to the requirements of the Taxation Office and Government department that is responsible for regulating companies and corporations.
You can usually operate your business using your company name, however, some companies register a trading name to operate their business under. For reporting purposes, you report under the company name and its registered identification number.
In some countries, the company/corporation is set-up as Pty Ltd, or an LLC, or Co Ltd. You will need to check your countries’ legal requirements if you are considering setting up as a company.
Usually, for taxation purposes you will be taxed as a completely separate entity, and you will report as such. Also, the tax is usually a set percentage amount regardless of your earnings (profit). In Australia, companies are taxed at a fixed rate of 27.5% of net profits if your turnover is less than $10 Million.
Think carefully before deciding to set-up as a company as there are many areas of compliance, reporting, and registration that you will have to comply with, including regulations from different areas of Government.
Please Note: We are not qualified tax agents and as such the information provided here is to be used as a general guide only. As normal you will need to consult your accountant, lawyer or legal advisor on which is the best business structure to start your business with.
Trading or business name registration
Usually, for each of the above business structures (with the exception of a company or corporation), a trading name is not mandatory. It is, however, a good idea to have one and register it, so that no one else can use it. Also having a trading name can clearly differentiate your business and provide a clear indication of what your business is all about. There is also a legal requirement that you are going to trade under this name, so it's not like having a web domain name parked away somewhere to prevent another business from using it.
Trading names (business names) are registered for a period of time (1, 2 or 3-years) so you will need to check with your local Government department (usually consumer affairs) on the process for registering a business name and the length of time it is registered for. In most cases, you can register for a business name over the Internet.
Where you may have some problems is when the business or trading name that you want is very similar to what exists at the moment. In other words, someone else has this business name or the business name you want sounds very similar to what someone else has. You may then have to think about some alternatives, so when you start to think about an appropriate business name have maybe 3 alternatives ready, in case you need to use the next one on the list.
Generally, the legal obligations for a business are similar around the world, for an example, the obligations for Australian based businesses would be as follows: