- Business structures: what are they
and why do you need to know about them?
So when people start trading,
you've got the option of just simply
picking out your shingle, trading,
starting to run your business,
and basically you are your business.
Now there are some downsides to that.
One of the downsides is that,
if your business does not do very well, and it fails,
your business debts are actually your personal debts,
and that is a way that you risk losing your personal assets,
so if you owe somebody else
business debts, they can actually sue you for them,
and they will be able to take your personal property.
The law doesn't differentiate between you and your business,
you're the same person,
if the business owes money,
somebody can come after you personally.
So that could be things like your car, your house,
so it could be quite devastating.
So most people suggest that instead of running things
that way, you put into place a legal structure
or a business structure, that gives you some protection,
it isolates you from the business debt.
So if your business goes under, you are still protected,
and they can't take your assets.
So the most simple way of doing it is by having a company.
Now if you have a company, you need to understand that
there are certain obligations
associated with having a company,
and how a company works is that you have
one or more directors and they run things,
they're in charge of what happens in the company,
and then you have one or more shareholders,
and they're in charge of, well, not in charge,
they get the profits.
So you could be a director without being a shareholder,
you could be a shareholder without being a director.
And sometimes, depending on how the company, constitution
which is the founding document,
depending on how that is worded,
the shareholders sometimes have certain power
over the directors.
Now the directors are responsible for what happens
in the business, so although you're creating a company
to isolate yourself and insulate yourself from debt,
if you are a director of a company,
and you do certain things, you will be personally liable.
So for example, if you don't pay the proper
employee tax or superannuation
required here in Australia,
then you would be personally liable for that.
The company goes bankrupt, it doesn't matter,
you still have to pay that as the director,
so that's the guy who runs the show,
not necessarily the guy who gets the money.
So, there are on various government websites
some really good guidebooks on director's duties
and obligations, and I will post, in this course,
I will post and link below so that you can get one of those.
So the other obligations are things like,
you can't treat the company money as your personal money,
you can only pay company expenses with the company money,
and then you have to take the money out of the company
in certain ways, for example paying yourself a salary,
or a contractor's fee, all those finer points
really are something that you should run by a tax accountant
because the accountant is the one who understands
and has all the knowledge on how that whole process works,
the nitty-gritty.
So a lot of accountants recommend that
rather than having simply a company,
what you do is you have a company
and then the company is the trustee of a trust,
and then the trust runs the business, it's...
I find it a little bit complicated I have to say,
and whether you should have just a company,
or a trust and a company, that is something again
to talk to the accountant about, because they know
and understand about tax implications.
I am not a tax expert, I don't like tax at all,
and I know the minimum about it,
so I cannot advise you about tax,
but I can advise you that the tax accountant
is the best person to speak to.
So when you're talking to them,
the things you need to think about is,
ease at which you can sell the business,
so how far into the business are you,
I mean, are you sort of towards the end of your working life
and you only want to work on it for ten years
and then you want to sell it,
is it something that your family might take over later,
and the answer to these questions
will give the accountant the guidance
as to what you should be doing.
Personally, I think that, well I certainly see too many
small businesses having a complicated structure,
and the complicated structure makes it more,
I wanna difficult for them to operate, it's just,
it's more administrative hassle,
and so if you're a solo
so-lo (chuckles) person,
you're running the business on your own,
you don't have staff, you don't have resources,
a company I feel is a good idea,
I'm subject to what the accountant says on tax,
because it's less complicated than having the trust and the
company together, but there might be very good reasons why
a trust and a company is good for you.
So talk to the accountant for that point.
I like companies because they're simple.
And then the other main type of business structure really
is, well, you get a joint venture and you get a partnership.
Now, a partnership is where two or more people
work together for a common business goal,
and a lot of people talk about partnership very loosely,
they say, I'm in partnership with someone,
I'm partnering with someone,
when what they actually mean is collaboration.
A partnership has got a specific legal meaning,
and what it means is that you're running a joint business,
and as such, your partner can, without your consent,
incur business debts,
and you are fully liable for those debts.
So, without your consent, your business partner
can incur business debts,
and you, even though you didn't agree to them,
you are fully liable for those debts,
if you are in a partnership.
I recommend avoiding partnerships,
unless you're in an industry that requires partnerships,
I think most industries have moved away from that now.
When I started my own law practice, oh 15 years ago now,
at the time I'm recording this,
you could only have a partnership
if you were starting a law practice.
But anyway, so partnerships can be tricky
and they can be dangerous, and I don't think
there's any good reason for people to go into a partnership.
If you are working together with somebody
on a joint business, your best option is
to look at one of the corporate structures like a company,
or a trading trust, or a combination.
And again, talk to your accountant about
which one is best for tax purposes.
So then that leaves collaboration,
or also sometimes called a joint venture,
which is where two individuals or businesses
work together for a common business goal.
This is slightly different from a partnership.
A partnership usually there's one business
and you're both working together for the goal
of that business, and a collaboration or a joint venture,
well a joint venture can be partnership so gotta be careful,
but generally it's separate businesses working together
for a common goal.
So, for example, in my business, I might collaborate
with somebody who is good at recording videos, for example.
And as part of the collaboration, I might
give some marketing,
some kudos, to the person who helps me.
So, they help me record the videos,
maybe they charge me much less than a normal client,
I market their business, they market my business,
other collaborations might be
somebody owns a venue, and somebody else is a caterer,
and so they work together.
Or people might collaborate on a book for example. So...
The downside or a slight warning about collaborations
is that very often people get so excited about working
together that they don't think about, well, don't think
really clearly about, and don't articulate, who has what
responsibility, what are you gonna do if your
fellow collaborator, don't go with a partner,
if they don't do what you think they are going to do,
or what you expect them to do,
so what if you thought they were going to be putting in
twenty hours a week and they only do five,
how is that, how are you going to deal with that,
how are you going to deal with it if the collaboration
loses money instead of makes money,
and that's quite simple, usually people pitch in 50-50
for the costs, but if you are collaborating with me
for example and I'm bringing my expertise,
you might bring money instead of expertise,
so it doesn't have to be financial.
And then what happens if it makes profit?
So, are you going to split it 50-50, is it going to be
a different split, how are you going to work out
whether or not you need to hire staff,
what is going to happen if
the business does quite well
but you don't want to work together anymore,
so you want to do your thing,
and the other person wants to do their thing.
So if you think about all of these things in advance,
collaboration can work really well.
And you don't need hundred of pages of legal documents
or anything like that, bulletpoint strategy is often a
very good starting point to help you refine
and it acts as a guide later on
if things don't go quite according to plan.
It is really important to deal with the ownership of any
assets that come out of the collaboration,
so whether it's money that comes into the business,
it might be an asset like a Facebook page for example,
if I collaborate with somebody else and we create
a Facebook group, who owns the group if we split up,
can I have the group, is it your group,
how do we work that out, who owns the clients?
And so, it will save a lot of time, effort, and stress,
if you plan for these things in advance,
and you can't plan for everything, obviously,
but the more that you can think of in advance,
the better it is, and that's why it's useful to brainstorm
with somebody like me who's helped many many many
collaborations, sometimes even just with their brainstorming
part, people come up with ideas that they think about,
or angles that they didn't think about,
and very often they're not actually ready
to collaborate yet, there's a few more things that they need
to sort out before they can collaborate,
or they might need another person to come in
and help with admin or something just to get
the collaboration off the ground.
So those are the different, so collaboration is obviously
not a business structure as such, it's two people
or two businesses working together for the benefit of
the individuals or the separate businesses, not that...
It does benefit the whole, but it's not one business.
If it's one business, remember, it's the partnership,
and the partnership is where it can get sticky and tricky.
Anyway, I've got some notes which I'm going to post
into this module, really it's something, it is so
individual to each business, I cannot say what type of
business entity you should,
you should have in your business,
it depends on tax situation which changes all the time,
it depends on whether you want to own this business
for a very long time, whether you want to get out of it
quite quickly, you need to think about capital gains tax,
all those things so...
The legal aspect is what I've discussed now,
but the tax aspect is something that should be discussed
with an accountant each time you go
into a new business venture.
All the best with your business venture,
and I hope you find the right structure just for you.