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Small Business Management Toolbox
Structures
The structure you choose for your business will have many financial and legal implications.
Sole trader
A sole trader business structure is the simplest and cheapest structure for a business owned
by one person. The owner may manage the business on their own or they may employ staff
to perform this duty or to work in their business. The sole trader takes all the profits for the
business but must also bear any losses.
There is no legal separation between private and business assets. This means that a sole
trader whose business can no longer afford to pay its debts can be forced to pay these debts
from their private assets (eg they may have to sell their home).
The business name will need to be registered if a trading name is used that is not the
owner’s own name.
Partnership
Partnerships can be formed with up to 20 members. In a partnership, partners share profits
(and any losses) in an agreed percentage, which usually corresponds to their original
investment.
Each partner may participate in the management of the business and all partners are liable
for all decisions. Partners are liable jointly and severally (ie separately) for total partnership
debt. Due to this, it is important to know the prospective partners’ backgrounds and
personalities before entering into a formal partnership agreement.
Partnerships can be formed verbally, but it is preferable to have a written partnership
agreement drawn up by a lawyer, addressing management and financial issues and
dissolution of the business. Most partnerships in Australia tend to be family partnerships.
Legislation that applies to partnerships varies throughout Australia.
Limited partnerships
Limited partners are similar to silent partners. They can offer additional capital but have only
limited liability. Management and control remain in the hands of the partners with unlimited
liability for the debts and obligations of the business. This complex partnership should be
discussed with a lawyer.
Corporations or companies
A corporation or company is a separate legal entity and has limited liability. Personal assets
of the owners are separate from those of the company. A company can be sued, own
property, borrow money and have its own bank account and is held responsible for any debts
owed.
The owners of the company or corporation are the shareholders. Management is entrusted to
directors, who in small business are often the shareholders. Financiers such as banks may
ask the directors (owners) to provide security or guarantees for the company.
There is a cost involved in forming a company, which can make it an expensive option unless
you are intending to operate your business for several years.
BSBSMB401A Establish legal and risk management requirements of small business
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Structures
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Small Business Management Toolbox
Trusts
Trust funds are established within a business structure mainly to minimise taxation. One
person (the trustee) is appointed to act on behalf of the trust. The trustee manages the
property, capital and income on behalf of the beneficiaries.
A trust fund is not a separate legal entity. The trust deed formalising the administration of the
trust should be drawn up by a lawyer. Seek professional advice from both your accountant
and lawyer before entering into this structure.
Incorporations for professionals
Professionals such as doctors, pharmacists, lawyers and accountants are prohibited by law
and by their professional bodies from forming a company, due to their professional liability.
This prevents them from hiding behind the corporate body.
Some professionals may wish to incorporate part of their business, such as administration.
This type of structure is quite complex, though it may result in tax benefits. A lawyer would
manage the incorporation of a company.
Co-operative
A co-operative is a body with legal status. It is formed and controlled by its members for the
common interests of its members eg for buying in bulk to reduce costs.
Co-operative societies are incorporated under special legislation known as the Co-operatives
Act. You should seek legal advice when entering into this form of structure.
Non-profit businesses
Non-profit businesses are businesses that do not operate for the profit or gain of their
individual members. This includes friendly society dispensaries and organisations
incorporated as associations (eg the Scout Association or the Salvation Army). These
structures may trade, employ staff and carry out other types of business activities.
BSBSMB401A Establish legal and risk management requirements of small business
© Commonwealth of Australia | Licensed under AEShareNet – S Licence
Structures
Page 2 of 2