In the initial stages, of planning your small business, this is one of the first decisions you will need to make. Each type of business ownership comes with its own different legal and operational requirements, and it’s also important to consider the advantages and disadvantages that come with those responsibilities and obligations.
Well, Truck Assist is here to assist you in deciding which type of business ownership is best for your future business.
The 3 Different Types of Business Ownership
The three types of business structures are
A sole trader is defined as an individual who is solely in charge of the business. Typically, it is this individual’s idea in which the business was built upon. This person is also solely legally responsible for all aspects of the business, and, like other structures, a sole trader can hire employees to assist in running the business.
A partnership is a company business structure involving more than one person (up to 20) running a business together. These partners agree to contribute money, labour or skill to the business where they share in the management, profits and losses. That is, unless the partnership is limited, where a partner’s losses are limited to the extent of their investment in the business.
A company is a separate legal entity from its owners and requires at least one shareholder (owner) and one director (who runs the business). Income and losses belong to the company. Similar
Pros and Cons of the Different Types of Business Ownership
The first thing you should know is that any money earned as a sole trader is treated as your individual income. This means your business is also taxed as an individual and business income is reported in individual tax returns. Similarly, a partnership structure sees partners pay tax on their share of the net partnership income they receive.
However, this financial freedom and flexibility unfortunately paths the way for one of the biggest disadvantages with these two types of business ownership. Personal liability. These means that any financial or tax burdens incurred by the business are the sole responsibility of the owner of partners. This is one of the biggest risks you take on when first entering business for yourself, so make sure you’re fully prepared for everything that comes with starting a small business <link>.
On the other hand, when operating a company, any income earned would belong to the business. Unfortunately, this also means there is no tax-free threshold, with a minimum 27.5% tax rate for small businesses turning over less than $10 million. However, one positive it that, because a company is a separate legal entity, the owners of the business are not personally liable for any financial or legal implications of the company.
In addition to tax, ongoing reporting, legal paperwork and licencing costs are all associated with the more complex company business structure. If you’re just starting a business, there should be no need for additional administration and financial pressures. A sole trader or partnership are simple business structures with less paperwork and ongoing costs as well as being easy and inexpensive to set up.
Finally, an advantage of a sole trader is that he or she has full control over the business’s operation. Typically, within a partnership or company form of ownership, business partners will need to cooperate and agree on financial and operational decisions before they are made. These encounters can cause friction with the company and result in longer lead times between when decisions are discussed and eventually made. Both of instances can lead to the dismantling of the company. So please make sure you’re going into business with the right people.
Which Business Structure is best Suited for Small Business?
Simply put – because a sole trader business structure is the easiest to set up and operate, it is likely going to be the best structure for your small business venture. If you intend to work alone, you will absolutely want full business control and agility once you start operating, and a sole trader ownership structure is the way to achieve that.
Of course, if you’ve been inspired to get into business with a friend or a group of ambitious individuals’ life yourself, then a partnership business structure is the next logical step. However, this does present some management challenges, so make sure you’re the person that brings this to attention before proceeding.
One final thing to keep in mind is that you can change business structure along the way. As your business grows, it’s only natural to consider expanding your capacity and limiting your liability with company and corporation ownership types. So, don’t stress, that’s a long road and many business successes along the way yet.
If you’ve got questions about which style of business structure will suit your potential business make sure you visit the Truck Assist Club forums to voice your queries. And if you’re already in the initial stages of planning your new business, please refer to our Ultimate Guide for Starting a Small Trucking Business <link> so that the start of your journey as an entrepreneur is a smooth one.