Understanding the different ways business entities are structured can help you when applying for a loan or setting up a new business, by acknowledging all the information lenders need to make a decision.
If you’re looking to diversify, setting up new entities and looking to apply for a business loan, it is important to familiar with the range of ways business owners can structure their enterprises. Your accountant along with the finance broker may be able to assist for tax purposes as well as applying for loans. Various banks may require different information depending on your business structure.
This knowledge is important because it can have a significant effect on how much business entities can borrow, the sureties business need to provide and the range of due diligence activities finance broker need to complete when putting a finance application together for a client.
These are the four most common business structures.
1. Sole trader
A sole trader is just as it sounds: a single individual trading under their own name who is responsible for controlling assets and making business decisions. They’re entitled to all of the profits from their enterprise after tax and are liable for any losses and debts. An ABN is required, and income from the enterprise is reported on the trader’s personal tax return. It’s a structure that’s simple to set up and operate.
2. Partnership
A partnership enables a minimum of two people and a maximum of 20 to operate a business together. It operates in a similar way to a sole trader business. Partners are jointly entitled to profits and jointly liable for losses and debts. Partnerships require their own ABN and tax file number.
3. Proprietary company
A company is a separate legal entity, owned by shareholders, that can incur debt, sue and be sued. It’s a structure that allows owners to limit their liability and not be held financially responsible for losses. Companies must be registered with the Australian Securities and Investments Commission and have at least one director who is responsible for the day-to-day running of the operation. Companies are more expensive to establish and operate than partnerships and sole trader enterprises and have more complex reporting requirements.
4. Trust
Trusts are entities that allow trustees to carry out business on behalf of trust members, who are known as beneficiaries. Established for reasons ranging from managing and protecting assets to controlling distributions and decreasing tax, trusts are established via trust deeds and are not legal entities in their own right. Discretionary trusts are typically used to operate family businesses, while unit trusts allow a greater number of individuals to pool their funds for a common investment. Trustees are liable for any debts incurred by a trust.