If you conduct your business alone, without a partner, then you are classified as a sole trader. This definition applies whether or not you have employees working for you.

Advantages:

• You are in charge and are responsible for all decisions.
• The success of the business belongs to you.
• It's an inexpensive business structure to establish and maintain, with the least reporting to Government.
• Losses from the business can be offset against any other income or future earnings.

Disadvantages:

• You alone have responsibility for the business. Holidays become a luxury you may not be able to afford simply because nobody else has the expertise to run your business efficiently in your absence.
• You are personally liable for all business debts, which means your assets (including your home) may be at risk.
• You continue to pay tax at the personal rate.

Partnerships

The establishment of a partnership can overcome some of the difficulties associated with being a sole trader.

A partnership enables a group of people to contribute their time, talents and money towards the business. In return they share the responsibilities and profits. In the absence of a formal partnership agreement, the law will assume that each partner has an equal share in the business.

A written partnership agreement makes a lot of sense. Such an agreement sets out the special conditions applying to the partnership. For example, one partner may be contributing more money or time. For this reason they may have a greater equity in the business. A formal partnership agreement will clearly spell out the conditions and diminish the likelihood of disputes.

Before entering a partnership, you should remember that many people who have been close friends for years have found it impossible to work together as business partners. Think about it!

Advantages:

• Taxation obligations may be minimised, particularly where members of the same family are included in the partnership. But the Taxation Office requires that all partners have real and effective control over partnership assets and liabilities.
• Responsibility for running the business is shared.
• Ability to raise finance for the business is enhanced.

Disadvantages:

• Liability is unlimited. If a partner absconds or dies, the other partners are left with the liabilities.
• If the partnership is dissolved or altered, difficulties may be experienced in obtaining an acceptable valuation or in raising capital to purchase a retiring partner's share.

Limited Partnership 

The New South Wales Partnership Act makes provision for a limited liability partnership structure whereby the liability of a partner contributing capital can be limited to the amount of financial contribution, provided that person does not take part in the management of the business.

The advantage of the limited liability partnership is that it allows an investor to invest in a partnership without being liable beyond the extent of his/her financial investment, provided certain conditions are met.

Proprietary Limited Company

A private company is a comparatively complex business structure. For this reason it should not be the automatic first choice for the average new business.

The Corporations Law was amended late in 1995 by the First Corporate Law Simplification Act. The effect of the amendments is to substantially ease the regulatory burden applying to small business. Under the amended legislation, proprietary companies may have only one director and only one member.

A Small Business Guide, which summarises the main provisions relevant to small companies, is available at all Australian Government Bookshops for about $5, phone Freecall 1800 202 049.

The Australian Securities & Investments Commission (ASIC) publishes Information Sheets dealing with single-director companies and these are available from ASIC Business Centers and the ASIC Corporate Relations Unit, phone 1300 300 630.

When you form a company, you become both an employee and director of the company.

Advantages:

• The liabilities of the shareholders are limited to the share capital they have subscribed and any debts they may have personally guaranteed.
• It is easier to spread ownership of the company.
• The company is a separate legal entity and need not be wound up in the event of death of the directors or shareholders.
• Under the imputation system of company taxation, company tax gives rise to tax credits, which allows the company to pass on tax benefits when paying franked dividends to shareholders.
• Raising money to put into the business in return for shares is an option.

Disadvantages: