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Choosing the right business structure for your small business

Choosing the right business structure for your small business

What “run small business” means?

A business typically means is an organization or an enterprise established, organized and operated to provide goods and service to the society under the incentive of gain. Usually it is being observed that a widespread business firms are present in capitalist economies. Major portion of those business firms are privately owned and involved in trading goods and services in exchange for money.

The word “Business” drives from the idea of being busy. Business is a set up for the production and distribution of services and goods with view of selling that in the market or for rendering of services for a certain amount or price. Business has two different sort of meaning. Business either indicates a particular firm or organization conducting business in a particular market like “Ford Motor Company” or it may also indicate an entire market sector like “The Automobile Business” or “Agribusiness”.

Depending on the purpose there are three different types of Business organizations. Namely profit oriented, nonprofit and state owned. Business can provide wealth and a high quality of life to the people who are directly or indirectly associated with it. In a deeper meaning, Business increase standard of life of the people living in a society by providing them goods and services and maximizing wealth of the owner or investor by increasing profit margin. Depending on the ownership style of a Business it can be divided into four types that are:

  • Sole Proprietorship Business Structure,
  • Partnership Business Structure,
  • Corporation Business Structure, and
  • Cooperative Business Structure.

Presence of different types of business makes people confused in making the right choice about what types of business he or she will be involved in. In most cases future business owners hesitate to make the most crucial decision about what structure is to be used for setting up a new business. Different forms of business utter many crucial issues like the legal liability, taxation and stakeholder rights etc.  Depending on the size of investment, ownership style and legal aspects of every respective country, people or entrepreneurs make their precious decisions on selecting the right business for small businesses structure.

Deciding on the Appropriate Business for Small Business Structure

Before deciding on selecting the appropriate business structure for your new venture, let’s say, in Sydney (Australia), it is wise to get advise from experienced accountant Sydney CBD. Some few quick facts about small business: small business accommodates more than 65% of employments since 1995. The statistics also clearly points that:

…over 50% of the working population earn their livelihood through working at different small businesses around the globe. With the current flow of the economy it is being observed that around half a million new small businesses get started each month around the globe. Among them around 52% of all the small business are home based.

Generally Small businesses are privately owned organizations. It may be corporations or partnership business or sole trade or proprietorship business as well. Different countries have different set of rules, regulation and taxation criteria for small business. It is really difficult to advice someone which business structure would be appropriate. But it can be determined easily how different business structures will affect due to the way they will be taxed.

The business structure one chooses may affect by four different elements, they are: the amount of tax one is liable to pay, the volume of asset and its protection, amount of ongoing cost and finally the client pattern. Business structure varies depending on geographical locations as well. For example: in Asian sub continent there six different types of business structures are found (Sole Proprietorship, Partnership, Corporation, Limited Liability Company and Cooperative), where in Australia they are limited to four structural types (Sole Trader, Partnership Business, Company Business and last but not least Trust) as per laws of Australian Government. Many countries have fixed the employee number for small business.  For example: As per rules of Australian Fair Work Act 2009, employee number in case of small organizations operating business in Australia is limited to 15 persons, whereas it is limited to 50 in case of European Union. According to Small Business Administration program of USA, small business employee range is fixed to 250 employees. In some cases classification of small business is conducted based on other different elements like sales volume, assets size or amount net profits. Following table shows business size categorization:

Business Size Australia USA EU
Minute/Micro 1-2 1-6 10
Small 15 250 50
Medium 200 500 250
Large 500 1000 1000
Enterprise 500 1000 1000

Some examples of most common small businesses are grocery stores, tea stall, bakery restaurants and professions like lawyers, photographers, CPA accountants etc. Small business owners use different sources for funding like: self financing, equity loan, borrowing from friends and relatives or by forming partnerships. Small businesses face a number of problems due to its size. In most cases it is being observed that small business result in bankruptcy due to absence of supply appropriate amount of capital.

Sole Trader

The easiest way to start any business is referred to sole proprietorship business. Usually the sole proprietor is the person who is self employed at his or her organization. The main advantages of sole proprietorship business are: easy to start, low start up cost, freedom from any regulation, freedom in decision making, advantage on taxation and most attractive one is no profit sharing. Besides all these advantages there are some disadvantages of this structure of business like low capital, less protection in name etc. The worst disadvantage of this structure is the owner is liable for everything associated with the business.

Partnership

Partnership business is usually formed based on an agreement where one or more people agreed on and signed in to combine their resources, expertise and share profit and risk as well. The most vital advantages of this small business structure are supplementary sources of investment capital, low start up cost and restricted regulation. On the other hand the disadvantages are unconstrained liability, lack of continuity and divided authority.

Limited Company

Corporation usually known as limited company is the only small business structure among the three which provides business a legal existence which is referred as legal entity. The benefit that owners of this organization avail from this legal entity, it separates business from the shareholders.  The advantages of corporation business are: limited liability benefit, transferable ownership, constant existence, variety of sources to rise capital, sound and effective management and last, but not least, name protection. On the other hand the disadvantage of corporation business is strong regulation, most expensive and difficult to form comparing to three different types of small business structure and over taxation problem. To decide which business structure to choose in respect of small business in Australia, one has to examine the following issues very carefully or visit www.citytaxaccountants.com.au  for a Free Tax Consultation.

  • The nature of risks and liabilities associated with every business structure.
  • The amount of formalities and expenses has to proceed while establishing any specific business structure.
  • Amount of Income Taxes and the tax benefits that specific organization avail.
  • Opportunity of capital rise and possible criteria of investment needs.

Expert accountant in Sydney CBD will be able to send you into the right direction, register the legal entity for your new business venture, obtain all GST, PAYGW and ABN registrations, assist you with bookkeeping and compliance on ongoing basis.

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