Business Structures

Summary

This video provides an overview of key business structures—sole trader, partnership, company, and trust—helping new business owners make informed decisions. It highlights the advantages and disadvantages of each structure, including factors like liability, tax rates, and growth potential. While a sole trader offers simplicity and control, a partnership enables collective resources but lacks personal asset protection. A company provides limited liability and tax benefits, while a trust offers maximum protection and flexibility, though it is more complex. The video encourages consulting with legal and financial professionals to choose the right structure for your business goals.

Takeaways

• 😀 Sole traders have full control over their business but are personally liable and have limited resources for growth.
• 😀 Partnerships offer shared knowledge and funding, but partners are jointly liable for debts and must agree on profit distribution.
• 😀 Companies provide limited liability protection for shareholders and are taxed at a flat 30% rate, but are more expensive to establish and manage.
• 😀 Trusts offer the most protection and flexibility in profit distribution, but they are complex and costly to administer.
• 😀 The right business structure depends on your goals and circumstances, so it’s important to consult with accountants or solicitors.
• 😀 Changing a business structure later on can be expensive and time-consuming, so it’s ideal to choose the right one from the start.
• 😀 Sole traders have no legal separation between personal and business assets, meaning they are fully liable for any business debts.
• 😀 Partnerships allow up to 50 partners, but each partner’s personal tax rate applies to their profit share.
• 😀 Companies are separate legal entities, meaning the company itself is responsible for its debts, offering personal asset protection for owners.
• 😀 Trusts are typically used by family businesses or those with substantial assets, as they provide flexibility in profit distribution and limited liability for beneficiaries.

Q & A

What is the primary consideration when choosing a business structure?

The primary consideration when choosing a business structure is your personal situation and the long-term goals of your business. This decision impacts your personal liability, tax obligations, and the flexibility of your business.

Can you change your business structure later, and what should you keep in mind?

Yes, you can change your business structure later, but it can be expensive and time-consuming. It's important to choose the right structure from the outset to avoid unnecessary complications.

What are the four most common types of business structures?

The four most common types of business structures are sole trader, partnership, company, and trust.

What are the key advantages of operating as a sole trader?

As a sole trader, you have full control over your business and you are taxed at your personal marginal tax rate. However, you are personally liable for the business's debts and have limited resources for growth.

What are the key disadvantages of a partnership structure?

In a partnership, there is limited protection for personal assets, as partners are jointly and severally liable for all debts. Additionally, it may be challenging to get all partners to agree on key decisions.

How is profit distributed in a partnership?

Profit distributions in a partnership are governed by the partnership agreement, and the profits are taxed at each partner’s personal marginal tax rate.

What are the advantages of setting up a company as a business structure?

A company provides limited liability for its owners, and it operates as its own legal entity. It can also make it easier to manage a change of ownership in the future. Company profits are taxed at a flat 30% rate.

What is the main difference between a company and a trust in terms of liability?

A company provides limited liability for its owners, whereas a trust offers the most protection for its beneficiaries, as it is not considered a legal entity itself, but a financial entity.

What are the main features of a trust as a business structure?

A trust is a complex structure that offers limited liability and flexibility in the distribution of profits. It is managed by a trustee on behalf of the beneficiaries, and profits are taxed at the beneficiaries’ personal tax rates.

Why might a family business choose to use a trust structure?

A family business might choose a trust structure if it spans several generations or if the owners have significant assets outside of the business, as the structure offers flexibility and asset protection.

How can an accountant or solicitor help when selecting a business structure?

An accountant or solicitor can help assess your business needs, explain the tax and legal implications of each structure, and guide you in choosing the most suitable one for your goals and circumstances.

What resources does the Davidson Institute offer for those starting a business?

The Davidson Institute offers a series of videos on topics like turning your vision into a plan, cash management, statutory obligations, and risk management. They also offer live webinars and downloadable guides on starting and managing a business.