Structuring a business and how to finance it
Read our guide to building a business to discover which structure will suit your brand best?
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Building a business from the ground up is a daunting task for anyone, no matter how entrepreneurial they might be. Businesses take time, strategy, money and hard work. If you intend to start a business, you need to make some serious decisions about how you are going to structure your business in order for it to function as effectively as possible. So, where do you start?
How do you structure a business?
Every business is different, so there's no one way to structure yours. Factors that determine which initial structure you choose for your business might include how much capital you have at your disposal, who you intend to work alongside, what level of control you want to have and the amount of tax you will be expected to pay.
There are a number of different business models you can choose, and we'll outline them in this guide. Equipped with this knowledge, you'll be able to find the best possible structure model that suits your business venture. You can then start considering what kind of funding you'll need to support it.
The following are the typical Australian business models:
A sole trader is essentially a one-person business (i.e. you). Being a sole trader doesn't necessarily mean that you have to work entirely alone since your spouse or partner may work alongside you. But you will all need to have the same goals in mind for the business as the other person won't have any official power in the business.
A partnership is two or more people who choose to be in business together. All members have equal control and equal responsibility for the business.
A company is a separate legal entity from the business director(s). Companies are owned by shareholders, and these shareholders can either be the director(s) or investors. A company can be either public or proprietary.
- Public. A public company can have more than 50 non-employee shareholders, and you have the option to list the company on the stock exchange.
- Proprietary. A proprietary company cannot have more than 50 non-employee shareholders, and you cannot list the company on the stock exchange.
Set-up costs of a business will largely depend on your industry and whether your business has a physical location (for example, setting up an online-company will generally be a lot cheaper than purchasing a physical store). That being said, as a general rule, the business model you choose will either have a low-to-medium set-up cost or a medium-to-high set-up cost for that particular industry:
Sole traders have generally low-to-medium set-up costs as there is only a single party involved in the business model and all risk is attributed to the business owner. If setting up a business with a physical location, this could prove higher for a single person. However, for online businesses, this structure would likely have the lowest overall set-up cost.
A partnership generally also has fairly low set-up costs (depending on the business model) as the parties involved split the set-up costs as well as any of the risks involved with setting up a business between themselves. Splitting the costs between partners may lower the overall set-up costs, particularly for businesses with physical locations.
Setting up a company usually has a high set-up cost as companies generally have numerous directors and also employees. They may often also require external investment.
How do I finance my business?
In order to succeed, all businesses need some sort of capital. If you're a sole trader or in a partnership, you may be able to fund the business with your savings. However, this will entirely depend on your industry and on your savings as well as on factors such as how much risk you are willing to take. Most businesses will likely use financing options in order to minimise the risk as there are a number of lenders willing to loan to startups.
How you finance your business will vary depending on your industry and the structure of your business as well as on the amount of funding that you need.
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Sole trader and partnership financing options
As a sole trader or part of a business partnership, you will usually have to put up funding yourself. You can do this in a variety of ways:
- Secured business loans. A secured business loan is a loan that is secured against your personal assets, such as equity in your home or commercial property. The amount of money that you can borrow with a secured business loan is usually only limited to the value of the security that you can provide.
- Unsecured business loans. An unsecured business loan is a loan without the need for asset security. Unsecured business loans are usually available up to $1,000,000. However, lenders of unsecured loans might require your business to have been in operation for a certain period of time, such as six months to a year. They may also require a minimum annual turnover, so if you're just starting out, you might not qualify for an unsecured business loan.
- Invoice financing. If your business provides goods or services B2B and you issue invoices, you may qualify for invoice finance. Invoice finance gives businesses access to the capital tied up in their unpaid invoices, either as required or as a revolving line of credit. Some invoice finance providers may require a minimum annual turnover and operation time, but others may not.
- Crowdfunding. Some small businesses may be able to get partial or full set-up funding from crowdfunding projects online. You will need to have a very well thought out business plan and may benefit from offering some sort of incentive.
As companies generally have higher set-up and maintenance costs, the funding might be slightly different. While the above options are all available to companies, additional funding routes are also available:
- Venture capitalists. Venture capitalists are groups of people who invest in startups with the intent to acquire shares in the business and to see a large financial return.
- Angel investors. Angel investors are individuals rather than groups who invest in a business in exchange for business shares. An angel investor will tend to have a more active role in running the business and helping it to succeed.
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How do I register a company?
Whatever company structure you choose, you will need to register it officially somehow. This process will differ depending on which company structure you opt for.
Before registering a business, you will have to come up with a business name. The cost for registering a business name is $34 for one year of $75 for three.
Registering as a sole trader is a fairly straightforward process. All you need to do is acquire an ABN (Australian Business Number), which you can do directly through the government website.
You can also register a partnership through the ASIC (Australian Securities and Investments Commission) website. This business structure may be more difficult to change than a sole trader set-up.
A company can be registered as either a public or a proprietary company, which you can also do on the ASIC website. Companies take more time and energy to register than sole-trading organisations and partnerships as there are more legalities involved.
Who's in charge?
Who has control over a business will differ depending on the business's structure. Some people might want full control over the industry, whereas others would prefer to let employees or partners take the reins.
Sole traders have complete control of their business since they don't have any employees, owners or investors.
Having full responsibility of a business is in many ways a positive. However, it could also mean that your personal property could be on the line if anything were to go wrong since you would be personally liable for the business in all circumstances.
Partnership business structures generally have an equal distribution of power within the business. However, this means that if someone doesn't hold up their end of the business, you will still be personally liable.
For those who start companies, there is a much broader scope for who can be in charge and who takes responsibility if something goes wrong. The directors of the company may or may not be shareholders. If it's a proprietary company, less than 50 non-employee shareholders are permitted. A public company can have more than 50 non-employee shareholders.
Generally, as a director of a company, you would have less control over the business than you would if you were a sole trader or in a partnership since you will have to answer to other directors and also to shareholders.
Directors of the company can be held liable for any negligence within the company, but shareholders who are not directors have no legal obligations if, for example, the company is sued.
How much tax will I pay?
Different business structures will face different tax laws.
As a sole trader, you will be taxed as per your personal income, so essentially the same as if you were working for somebody else. However, you will be able to deduct any business-related expenses at the end of the financial year when you file your individual tax return.
As a partnership, you will be expected to file a partnership tax return as well as an individual tax return. The amount of tax you will have to pay will be based on how you have distributed the profits and losses from the business between yourself and your partner(s).
Companies are generally subject to a base tax rate of 27.5% of the profits. This tax is totally separate from your personal income (which you will still pay tax on as standard). Companies may also qualify for offsets, tax concessions or rebates, so it's a good idea to have a decent accountant.
Things to consider
So, where do you go from here? Nobody knows your business better than you do, and nobody can predict which factors are the most important for you to consider when setting up a business. If you want complete control over your business, being a sole trader might be the best option. However, you'll also face more personal risk if something were to go wrong. If you have interest from external investors and are intent on making larger amounts of capital, maybe setting up a company would be a good idea.
Set out a detailed business plan and weigh up all the risks and benefits before applying for finance. Then make sure that you compare business finance options carefully to get the best possible deal for your business.
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