Start-Ups: How to Structure a New Business?

In a recent article in the Sydney Morning Herald (available here), Singapore based start-up, iBosses, which is poised to begin floating on the stock market, claims that its success can be emulated in 8 simple steps. The start-up itself has, as of yet, failed to reach the $100,000 mark for revenue but is confident on its prospects for long term success.

One point which iBosses does not mention in its recipe for success, and an often overlooked step when setting up a private enterprise, is the selection of the right mechanism through which to run a business. At Szabo & Associates, our highly experienced team of business lawyers routinely advise start-ups on how to structure their affairs so as to accurately reflect their needs. We do this in conjunction with your financial and tax advisers. If you are looking for comprehensive, commercially oriented lawyers to help you set up your business, contact our team today.

Business structures - aren't they all the same?

It is not uncommon for people to think that all businesses are structured along similar lines, regardless of their trade. The reality however, is that businesses often take advantage of different business frameworks – in some cases, a business can make use of multiple structures, but this tends to be more common among larger organisations with an international presence.

It is vital that when thinking about setting up a business in NSW, you consider carefully the different options available to you and whether or not it will be able to meet your own particular needs.

What options are there?

There are a number of different business structures available that may prove useful for starting a business:

Sole trader

Of the various different structures that exist, the option of operating as a sole trader is arguably the least taxing in terms of legal requirements. If you are thinking about operating your own business as a sole trader, you will in fact be doing so under your own name. In other words, the business is you, and you are the business. There are no significant legal requirements to speak of in terms of operating under your own name. However, the situation is different should you decide to operate a business as a sole trader under a name that is not your own. This name must be registered under the Business Names Registration Act 2011.

The utility of operating as a sole trader is that it is relatively inexpensive to do so, and fairly quick to organise. It is important to note, however, that by doing so, in carrying out business activities – buying goods, taking on loans or otherwise participating in the commercial environment – it is you as an individual that bears the risk should you fail to meet any of the obligations you undertake to discharge. In other words, you will be personally liable for all loans and other contracts that you have entered into while acting as a sole trader.

Partnership

It may be that you are looking to go into business with someone – and the idea of running a business on your own is not as exciting as combining your efforts with those of someone else. In these cases, a Partnership can be very useful. This is defined under the Partnership Act 1892 as a relationship, which exists between two persons carrying on a business in common who a view to profit. In practice it will involve you, and someone else, entering into an agreement – verbal or written – to work together.

Generally speaking, partnerships are relatively simple to organise – an agreement to enter into a partnership would on most cases be sufficient. It should be noted, however, that there are in fact several different kinds of partnership, each with its own legal requirements in terms of creation, partner liability and tax treatment.

It is important to understand the importance of setting out the nature of a partnership in writing at the earliest opportunity. This document is known as a ‘partnership agreement’. It is not uncommon that in their excitement to go into business together, people often gloss over the responsibilities that they should have in operating their business as a partnership, and only come to consider them when there are disagreements. This can result in costly and drawn out litigation, which can damage a business and could have been avoided if parties’ rights and responsibilities had been accurately noted down in a clear and concise partnership agreement.

Given the importance of a well-drafted partnership agreement, and the different types of partnership that exist, it is vital that specialist advice is taken on the specific kind of partnership that would best suit your needs.

Private Limited Company

Among the different kinds of business structures, a private limited company is one of the most popular. The defining feature of a limited company is that, when created, the business – the company – enjoys separate legal personality from the people that created it. If you decide to incorporate a private limited company, it will exist separately from you, and be able to do all of the things that you would otherwise have done: buy/rent property; employ staff; and enter into contracts to buy/ sell goods and or/ services.

The separate legal personality of a limited company also offers those who have an interest in the company, its shareholders, a bonus. Unless they breach various statutes which impose strict liability on its Directors, they will not be held liable for company debts. If you create a limited company that later suffers financial hardship, e.g. enters into loans that it cannot repay and becomes insolvent, your personal assets will not be able to be seized to repay the outstanding debt. This is in direct contrast to the situation facing sole traders.

It is also important to point out that incorporation of a limited company also incurs significant regulatory costs: you will need to provide a lot of information regarding the financial health of the business; its management; and tax responsibility for money earned on a yearly basis. Regulators exercise a significant degree of oversight of company affairs, and will need to be satisfied that the company is being well run.

Speak to specialist advisors

The prospect of running a business is an exciting one: offering a product or service that is better than that currently on the market, or offers something different to the norm. However, it is important that when setting up a business, you take advice on what business structure will meet your needs. At Szabo & Associates, we take pride in working with start-ups across a variety of sectors to structure their business in a way that will allow them to succeed. If you need help in understanding the different kinds of business structure, and in choosing one which will work for you, contact our team today.