Let’s be honest here for a second, nobody likes dealing with the technical aspects of starting a business. There are simply way too many legal technicalities you need to be aware of and keeping an eye on all of them can be both tedious and awfully taxing. Yet, if such things are neglected, hefty penalties and fines will ensue. To avoid a rough start filled with legal troubles and other hiccups, your best bet is to register your startup first, before you actually kick off. This way, you’ll be saving yourself a lot of trouble, not to mention a whole lot of money which can later be used for more important things. So, let’s get straight down to business and explain exactly which legal structure you should choose for your startup.
You might be asking yourself, why should I even bother looking at different legal structures; at the end of the day they’re all the same, right? Wrong, the type of legal structure you choose for your startup will determine how much you need to pay in taxes, how liable you are for your business and how flexible your business is with regards to dealing with ownership changes. This is why you need to weigh all your options first, before making the best choice for your business. Currently, there are four main options you can go for, them being: sole-proprietorship, partnership, corporation, and a limited liability company. Each of these has its own pros and cons which you need to consider carefully; what might be perfect for you might not be so for some other business.
Sole-Proprietorship really is the simplest and most straightforward option out there. As the name suggests, you are the sole owner of your business, meaning that there is no other entity between you and your business and you’re treated as one and the same. As a result, you pay much less in taxes than the other three options because your business’s overall income and expenses are a part of your personal tax returns. However, this also means you are held personally accountable if your business should go bankrupt or face any legal trouble. Likewise, in the case that you get sued, your personal assets may be at risk. Still, you get to be in charge of your own business without an annoying middleman grabbing a slice of your pie or telling you what to do. So, in order to get licensed as such, all you need to do is submit an ABN registration which can be done online in a couple of minutes at most.
Similarly to the sole-proprietorship, general partnerships have two or more partners who are equally liable for what happens with the business. Moreover, each partner pays their own taxes individually based on their share of the income or loss. This is the perfect structure for startups if you’re not flying solo, which is most often the case. There’s yet another form of partnership that’s suited for canny entrepreneurs called limited partnerships. Namely, in this partnership, there’s at least one general partner and the other, limited partners, are only held liable for the amount they’ve invested, not the whole business, making it ideal for investors. This way you’ll have a neat business platform where people can actually invest in your startup while you do all the rest. The main problem with this method is that you have to cooperate with someone in order for it to work and if that someone is not being cooperative, then this lack of agreement may affect your entire business venture.
Corporations are separate legal entities which are owned by shareholders. Again, there are two types, same as with partnerships, based on the method of taxation. On the one hand, you have the S corporation which lets you enjoy the limited liability of a shareholder, meaning you are not as liable for your company as when you’re the sole-proprietor, which is great, yet you pay taxes as if you were one. Despite this, S corporations can only have at most one hundred shareholders and there can be no foreign ownership involved which is not so great for international startups. On the other, you have the C corporation, which isn’t as limiting, but it’s extremely expensive to maintain. Both of these are rather complex and are probably not worth the effort for most startups.
Finally, limited liability companies or LLCs for short are somewhat of a hybrid form of corporations and partnerships. Same as with a corporation, your company is an independent legal entity which makes you less liable and, yet, as with a partnership, you are still the owner of the company. Being not as strict, complex and expensive as a corporation, as well as relatively easy to set-up like a partnership is, it’s the best of both worlds. In addition, a possible downside of this option is that you have to pay self-employment tax for your share of the spoils and the lenient structure means it’s not so investor-friendly.
All in all, the choice really comes down to your particular business. Partnerships and LLCs offera lot more flexibility than corporations, for example, at the expense of control, whereas if you prefer a more hands-on approach, sole-proprietorships enjoy full ownership with all its liabilities and potential drawbacks.