Suitable Business Structure For Small Business In Australia: Sole Trader Vs Partnership

Sole Trader Business Structure in Australia

Discuss about the Started In Small Business For the Dummies.

In Australia, there are different business structures which can be selected by the individual(s) wanting to start a business in the nation. These four are different business structures which can be opted for this purpose; these include sole trader, partnership, company and trust[1]. However, in context of the requirements put forth by the client in the meeting which had been undertaken yesterday, only two business structures are relevant, in terms of sole trader and partnership. This report covers a detail on the laws which are applicable on the business structure suitable for the client.

In the case of Julie, she wanted a small business where she had the entire control over the business which she started. This makes the sole trader business structure as the most suited business structure for her. A sole trader form of business structure is started when an individual decides to start the company. In such businesses, the individual trades and has the legal responsibility for all of the business aspects. Included in this are the losses and debts which cannot be shared with other people. This form is deemed as the most simple and the most inexpensive form of business structure which can be opted for starting business in the nation. This form allows for the decisions to be made in an autonomous manner by the person running the business[2].

The key features of this business structure include that it is easy and simply to initiate and operate. It allows the person to have the entire control over the business decisions and on the assets of the business. There are very less reporting requirements and is a low cost structure in general. The sole traders, in order to file their tax returns, are allowed to use their individual TFN, i.e. Tax File Number. However, a key point which has to be kept in mind is that the sole traders have unlimited liability, where their personal assets are at a risk, where the things go haywire. This means, that the personal assets of the business owner can be seized in order to recover the debt[3].

Another substantial advantage is that the losses which are incurred as a result of the business activities, they can be set off against the income which is earned, for instance the wages or the investment income, based on specified conditions. There is no need of opening upon a different and separate business bank account, which is a requisite in company form of business structure. However, in order to use the personal bank account, there is a need to keep the financial records of minimum of last five years. In sole trader form, the business owners are not the employee of business. Thus, the sole trader needs to pay to self, a sum which is in general the distribution of profits. However, this sum is not deemed as wages for the taxation purposes.

Key Features of Sole Trader Business Structure

Just because it is a sole trader business structure, does not mean that help of others cannot be taken. The sole trader can employ individuals to run the business. However, this requires mandatory obligations to be fulfilled, in terms of superannuation contributions and the compensation insurance of the workers. Again, where the business is undertaken without the employees, there is no obligation of paying superannuation contributions, payroll tax and the compensation insurance of the workers based on the income which is drawn from the business[5].

When the business grows, it can be easily changed in another business structure; conversely, even the winding up process of sole trader is very easy. Unlike the partnership business structure where the partnership act based on different jurisdictions have to be followed, or for company business structure where the Corporations Act, 2001[6] has to be followed, the sole trader has no such legislations ruling over it, making it a hassle free business structure, with minimalistic regulatory controls. The problem of limited funds can easily be solved by taking loans, as standard mode of raising funds[7].

Conclusion

Based on the research conducted the aforementioned discussion had been carried on to highlight the different features of sole trader. This has been based on the requirements which the client Julie had provided with regards to her business of designing the pottery creations. This report highlighted the laws and the features which surround sole trader and even on the two other business structures of partnership and company. This was done to show that sole trader is a very easy and simple form to run business in Australia, and thus suits the criteria laid down by the client.

Even though the earlier report touched upon the sole trader as being the best option for Julie for opening up her own business, there is a need to weigh in the different alternatives which are available for Julie. This would help her in comparing the different avenues which she has to start up her business.

In a sole trader business, the client would have the full control over the business and can employee people to help her in her daily business operations. This would also allow her to steer clear from the plethora of regulatory or compliance requirements which are applicable in the company form of business structure[8]. There is no burden of double taxation, which is often present in cases of companies, where both the income of company and that of the individuals is taxed[9]. The affairs of the business would remain private as there are no disclosure requirements in sole trader business form[10]. It is easy to wrap up the business at a flick of hands, and there is no need of getting into the detailed winding up process as is required under the company form[11].

Advantages and Disadvantages of Sole Trader Business Structure

However, the client would not be able to raise money from general public and would have to rely on standard financing options in sole trader, as against company form, where both these mediums can be used. There is also the issue unlimited liability under the sole trader business form which is not present in the company form of business structure[12]. In comparison of the features, merits and demerits of the two forms, sole trader still comes out to be a better choice for Julie.

When the business structure of partnership is looked at, there are a number of common features with sole trader, in terms of unlimited liability and restriction on raising capital from general public. However, when it comes to the complete control over the business, it is present in sole trader, but not so much in partnership. This is because the partners share control over the business in a partnership, which is not the case in sole trader as the owner is the only person running the business in this form[13]. Again, there is no specific law which applies on the sole traders, but there is applicability of partnership act of the particular jurisdiction in which the partnership operates. There is also the option of restricted the liability in partnership by opting for a limited liability partnership[14]. However, the same is not possible under the sole trader form. In comparison to partnership, the initiation and winding up process of sole trader is simpler.

Conclusion

To bring this discussion to its end, it can be concluded that sole trader is the best suited option for Julie. This is particularly true in context of her requirement of full control over the business and in terms of keeping the business small. This would allow her to start the business, manage it and even end it based on her choice.

In the interview which was conducted with Julie yesterday, certain requirements had been highlighted for her business of designing the pottery creations. It had been provided that Julie wanted to keep the business small and wanted to have full control over the business. She was clear on not going for a company business structure and also had been apprehensive about unlimited liability which comes in partnership business structure. However, she also highlighted that her financial position was strong enough and that where required she had the capability of raising loans. Based on this summary of facts of case of Julie, it is advised to the client to opt for sole trader as the selected form of business structure for her.

Comparison between Sole Trader and Partnership Business Structure

The first reason for giving this advice is that a sole trader business structure would allow Julie to have full control over her business. This means that she would be free to do what she felt in the business, take all the decisions, undertake the responsibility of running the business in the manner she feels is right, and even end it without any interventions where she feels that she does not want to continue the business. The entire control of the business would be in her hands. However, this also means that all the liabilities would have to be borne by her alone. She would have to be liable for the debts of the business and also for fulfilling the obligations in terms of rents, taxes and the like. She would still be able to hire skill pool in terms of employees, who can assist in her work, but the liabilities for their work would also be upon Julie due to the applicability of vicarious liability principle. This principle provides that the employer is liable or responsible for the actions which the employees undertake, towards the third party. Thus, this may end up raising the chances of her liabilities.

With regards to partnership business form, where the friend of client’s husband had a bad history is not the reason for steering clear from this form. It is just that the requiem nets of the client are fulfilled in a more appropriate fashion under the sole trader form. This is in terms of her need of running the business alone. Partnership requires business to be run by two or more people, which is against the basic requirement of the client. Also, this form would not be as easy, as the sole trader business structure is, due to the minimal regulatory requirements. The client has already denied going big as a company.

Hence, the best advice for the client based on the information provided by her in the undertaken interview, is for Julie to start her business in a sole trader business structure. Where in future she feels that she needs to grow, and is ready to share the control of business with others, she can easily change her sole trader business structure to a partnership or even to a company for that matter.

Carrington A, Business Structures and Incorporation (Aauvi House Publishing Group, 2012)

Cassidy J, Concise Corporations Law (The Federation Press, 5^th ed, 2006)

Curtis V, Getting Started In Small Business For Dummies (John Wiley & Sons, 3^rd ed., 2016)

Gibson A, and Fraser D, Business Law (Pearson Higher Education AU, 2013)

Graw S, An Outline of the Law of Partnership (Thomson Reuters (Professional) Australia Limited, 2011)

Latimer P, Australian Business Law 2012 (CCH Australia Limited, 31^st ed, 2012)

Lipton P, Herzberg A, and Welsh M, Understanding Company Law (Thomson Reuters, 18^th ed, 2016)

Pollard J, Smart Trading Plans (John Wiley & Sons, 2011)

Story J, Commentaries on the Law of Partnership, as a Branch of Commercial and Maritime Jurisprudence, with Occasional Illustrations from the Civil and Foreign Law (The Lawbook Exchange, Ltd., 2007)

Vickery R and Flood M, Australian business law: compliance and practice (Pearson Australia, 2012)

[1] Paul Latimer, Australian Business Law 2012 (CCH Australia Limited, 31^st ed, 2012)

[2] Veechi Curtis, Getting Started In Small Business For Dummies (John Wiley & Sons, 3^rd ed., 2016)

[3] Department of Industry, Innovation and Science, Sole trader (7 June 2017) <https://www.business.gov.au/info/plan-and-start/start-your-business/business-structure/business-structures-and-types/sole-trader>

[4] Ibid

[5] Ibid

[6] Corporations Act, 2001 (Cth)

[7] Justine Pollard, Smart Trading Plans (John Wiley & Sons, 2011)

[8] Andy Gibson and ‎Douglas Fraser, Business Law (Pearson Higher Education AU, 2013)

[9] Julie Cassidy, Concise Corporations Law (The Federation Press, 5^th ed, 2006)

[10] Phillip Lipton, Abe Herzberg, and Michelle Welsh, Understanding Company Law (Thomson Reuters, 18^th ed, 2016)

[11] Ann Carrington, Business Structures and Incorporation (Aauvi House Publishing Group, 2012)

[12] Roger Vickery and ‎MaryAnne Flood, Australian business law: compliance and practice (Pearson Australia, 2012)

[13] Joseph Story, Commentaries on the Law of Partnership, as a Branch of Commercial and Maritime Jurisprudence, with Occasional Illustrations from the Civil and Foreign Law (The Lawbook Exchange, Ltd., 2007)

[14] Stephen Graw, An Outline of the Law of Partnership (Thomson Reuters (Professional) Australia Limited, 2011)