chapter 5

Business Structures

Structures

Your Options

(i) Sole Trader
(ii) Partnership
(iii) Corporation

Whether you're just starting out or deciding on the right structure for your existing company, understanding the law around business organization is important. You'll have to assess the nature of your business to figure out which option will afford you the most benefits.

Sole Trader

This is the most common structure for online store owners, and also the easiest to run and set up. The federal, state and local governments are each responsible for registering different types of businesses. You can check the Australian Business License and Information Service to see which apply to you.

As a Sole trader, you'll also have to register your company’s name with the Australian Securities and Investment Commission (ASIC). This process is simple, fast and can be completed online. Since no separate entity is created for the business, the taxes associated with your company are filed on your personal tax return.

Although it’s simple to open and run, being a sole proprietor does have disadvantages. Your business is not a separate entity from you and although you receive all profits, you are personally liable for all debts or legal action taken against the business. This common and simple structure is ideal for a shop with little risk of liability.

Pros

(i) Easy to set up and run.

(ii) Control of all business decisions and profits.

 

Cons

(i) Not a separate business entity.

(ii) You are responsible for all debts or actions against the company.

Partnership

A partnership is another common structure for small businesses. These are formed when two or more individuals are co-owners of a business venture. This structure allows individuals to pool their assets and skills to increase their chances of success.

Agreements

Considerations

A well-drafted and balanced agreement should include:

(i) Names of partners and how new partners can be added
(ii) Outline of the business
(iii) Investment, liability and profit share of each partners
(iv) What if partnership is dissolved

Like a sole trader, a partnership is not a separate legal entity from its owners. This means the partners are personally liable for all debts and obligations of the business. An additional consideration is that all partners are liable for the actions of the others in relation to the business. One partner may be responsible for the debt of another if their assets are insufficient to cover an obligation..

With this form of organization, remember to focus on the human element. There’s always a chance that a friendly partnership can change in the future. For this reason, make sure to have a lawyer assist you when drawing up a partnership agreement. Selecting the right partner is important because you’re liable for the debts and actions that they incur on behalf of the business.

Pros

(i) Allows for a division of labor.

(ii) Partner brings more
capital investment.

 

Cons

(i) Not a separate entity.

(ii) Jointly liable.

(iii) Business relationship can sour.

Company

Running a company has many benefits and increases the credibility of your business. The process is more complicated but does have many potential benefits for your online shop.

The business cannot be called a company until it’s been registered with ASIC. A registered company can conduct business throughout the country, without needing to register in individual states.

One of the most notable differences about this business structure is that the corporation becomes a separate entity from you as the owner. You’re not personally financially liable for what happens to the corporation. This is a good business structure if your company is growing and there is a greater potential for liabilities.

Although this provides a lot of personal protection for you as a shop owner, it's not the right choice for every business. The costs associated with setting up and running a corporation are higher, and a company requires extensive record keeping.

Pros

(i) Separate entity.

(ii) Limits your financial liability.

(iii) The corporation survives the death of shareholders or sale.

(iv) Tax advantages.

(v) Improves your credibility.

 

Cons

(i) Heavily regulated. This means that there are many requirements for running a corporation.

(ii) Extensive record company.

(iii) More expensive then the others to form (fees associated with incorporation).

Choosing a business structure

It is really important that you consider the particularities of your business when deciding on the structure that is right for you. Although some options have benefits on paper, they may not be a worthwhile choice for your business. There are detailed and helpful resources made available to you by ASIC. Before you finalize your decision or begin the process it is highly advisable to consult a lawyer to insure that you have made a sound choice, and that the process is completed properly.

4 Steps to Registering

(i) Reserve your company name — The name of your company must not already be registered with another company or business.
— Before deciding on a name, check its availability.
— Your company name must identify its status as a company (see this chart to find which abbreviation applies to you).

(ii) Plan how your company will be internally governed — Be sure to seek legal advice for this step.
— You must decide how your company will be run.
— You can either use the Replaceable Rules found in the Corporations, write your own constitution, or use a combination of both.
— Replaceable Rules cannot be used if you are a sole director or shareholder of your company.

(iii) Get the Required Consent — Before registering, you need written consent from those who will be the director, secretary and member of the company.
— These people must be 18 years or older.

(iv) Register your company — There are two ways to register your company: Through a service provider using software connecting directly to ASIC or by completing the application manually and mailing it to ASIC.

Choosing a Business Structure

It's important to consider the unique aspects of your business when deciding which organizational structure to choose. Although some options have benefits on paper, they may not be a worthwhile choice for you. There are detailed and helpful resources available from the Government of Canada (Canada Business Network). The checklists, information and planning strategies can help you make the best choice for your business. Before finalizing your decision, consult a lawyer to make sure you’ve made a sound choice and that the process is completed properly.

Conclusion

Share the Legal Guide if you think that it may be helpful information for your friends and followers.

 

Being aware of and obeying the rules that apply to you as an online business owner is an important aspect of running your shop.

Protecting your brand, your assets, and maintaining a positive customer relations are all affected by your ability to understand and obey the law.

The law is fluid and can always change! The resources provided to you in this book will allow you to stay up to date and make sure you are aware of requirements placed on you.

Ready to start your online business?

Try Shopify for free for 14 days.

Start your free 14-day trial today!