This Has Got to Be the Most Boring Stuff in the World
I know this because I watch people's eyes glaze over when I ask: how are you structured? Are you a sole trader? A partnership? A multi-director company or a single-director company?
“Oh, my accountant takes care of that,” comes the reply.
And he does — from a tax perspective. But what are the advantages and disadvantages of the structures themselves? Let's start with a sole trader.
Sole trader
A sole trader is very simple to set up: you open a bank account, get a Tax File Number, and begin trading. From a protection point of view, this is probably one of the most dangerous structures you can have. Every account you sign, every liability you incur, you become personally responsible for. That's correct — your house is exposed, any money in your bank account is exposed. Legal action, judgements, bankruptcy, even your credit rating is exposed. The buck stops with you, and that includes your partner.
Partnerships
Usually initiated by accountants to share profits and taxable income between husband and wife or business partners, which lessens the tax burden — and it does. However, personal assets held by all partners are exposed. Banks require all partnership signatures, and account forms require all partnership signatures and personal guarantees. Instead of one person being liable, all partners become personally liable.
Multi-director companies
People often want to be a director of a company for the prestige, to have a say in how the company trades, expands, or reduces. Multi-director companies are far safer than a partnership or sole trader, but being a director opens you up to fiduciary duties. Again, agreements, trading accounts, taxation, bank loans, or any finance would in most cases be subject to personal guarantees. What's even worse is that in trade accounts or most creditor agreements today there's a right to caveat your property — so if the company collapses, creditors can simply pursue your personal guarantees and activate a caveat on your property to recover the debt from the equity in your property.
Single-director companies
In 1993, the corporate regulator changed the Corporations Act to allow for single-director companies, with the same person able to be the company secretary of a small proprietary limited company. This truly helped regain the original purpose of why proprietary limited companies were set up some sixty years ago: for business to trade and limit liability, so that if the storm arrived, personal assets had some protection.
One advantage of a single-director company is that — provided you haven't traded insolvently, committed an illegal act, or breached your fiduciary duties — if the company fails, the debts stay within the company, subject to any personal guarantees. People can get on with their lives without losing everything. It's an offence to try to disadvantage creditors; on the other side of the coin, you're entitled to protect your personal and family assets, and your partners' and investors' assets.
Obviously, I've painted broad strokes. But using the right tools and structure — loan agreements coupled with PPSR's — will help you with the storm. There is much more to protection than just setting up the company.
When your next move counts.
Want to see how this applies to your business? Read more on business structure design or get in touch.