Types of business structures

What is a business structure?

A business structure is the form, or type of business entity, under which you choose to run your business. There are a number of structures you can choose and each one has advantages and disadvantages. The structure you finally select will depend on the type of business you run and also on the objectives, both financial and personal, incorporated in your business and personal goals.

For example, if you are looking at bringing in investors at a later date, or if you have plans to turn your business into a public company in the future, then these goals will affect the structure that will best suit your business.

The choice will also depend on the size and nature of your operation. Whether you are buying or setting up a new business, the legal considerations that may be involved will also affect the type of structure or “legal entity” you will adopt. Most small businesses in New Zealand are operated as sole traders, partnerships, companies, trusts, or other less used structures such as cooperatives, etc.

Correct structure critical to business

The choice of your business structure will have certain implications.

These will include:

  • Taxation.
  • Responsibility for debts and other liabilities.
  • The ability to attract funding.
  • The cost of setting up.
  • The cost of compliance with regulations such as tax or ACC.
  • The ability of the owner to dissolve the business (if required).
  • The governing structure of the business.
  • Any self-contracting relationships.

Basics of legal entity

Apart from the original decision to go into business, perhaps the other most important decision is which entity the business will be run under. When an entity has been selected, the legal implications will need to be considered.

Some structures have very little legal requirement (as far as compliance is concerned) while others have to follow regulations and be accountable to government departments. The decision you make will be based on factors such as the number of owners in your business, the desire to limit your exposure to liabilities of the business and the need for tax savings.

There are 5 types of business structures that you can use.

  1. Sole Trader: One person controls, manages and owns the business.
  2. Partnership: Two or more people run the business together with other partners.
  3. Company (Limited Liability): This structure is a legal entity and is recognised as a legal ‘person’ in the eyes of the law.
  4. Trust.
  5. Non- profit Organisation.

Types of structures

Apart from the original decision to go into business, perhaps the other most important decision is which entity the business will be run under. When an entity has been selected, the legal implications will need to be considered.

Some structures have very little legal requirement (as far as compliance is concerned) while others have to follow regulations and be accountable to government departments. The decision you make will be based on factors such as the number of owners in your business, the desire to limit your exposure to liabilities of the business and the need for tax savings.

There are 5 types of business structures that you can use.

  1. Sole Trader:
    One person controls, manages and owns the business. The simplest form of business structure is that of a sole trader. This is where you trade on your own account as a self-employed person. A sole trader usually has no formal or legal processes to set up the business.
    The owner/manager is personally entitled to all profits, but is also personally liable for all business taxes and debts. No licenses or no legal involvement is required, except with the IRD for taxation and GST.
  2. Partnership:
    Two or more people run the business together with other partners. Each partner assumes full responsibility for all the debts of the business. The two or more people enter into a business together for the sole purpose of maximising revenue and therefore the profit. One of the main advantages is the skills that each partner can bring into the business, as well as the extra capital.
    The sharing of responsibility and liabilities between the partners is also a factor that shouldn’t be discounted. Be careful of the people you bring in because you are responsible for their actions, even if you know about it or not. They can make decisions resulting in losses for your business. You will share this loss, because you are jointly liable for what they do.
  3. Company (Limited Liability):
    A company is a legal structure that a business owner can use to run their business through. It is the one legal entity that has more to do with complying with regulations and other aspects of the law than other business structures.
    It is a formal and separate legal entity in its own right, separate from its shareholders (or owners). It is formed when a group of people exchange money and/or property for shares in an enterprise registered under the Companies Act.
    This is probably the most common form of business structure because it provides some advantages that one should look at when going into business. The shareholders are not the business but they have shares in the business. The owners or shareholders in the company are merely holding an interest in the business.
  4. Trust
    The most common definition of a trust is; “A trust is an equitable obligation that binds a person called a trustee to deal with property over which he/she has control (called a trust property) for the benefit of other people (beneficiaries) and of whom he himself may be one and may also benefit anyone else who may enforce the obligation”.
    It is a type of legal entity that can own and hold title to property held for the benefit of one or more persons. It is a legal relationship, which is created when a person (known as a settlor) places assets in the control of another person (trustee) and these assets are intended to benefit other people (beneficiaries) or they are for a specified purpose.
    It is not an accepted as a legal entity like a company so action can be brought against it for liabilities which have no limitation under law.
  5. Non- profit Organisation.
    A non-profit organisation is any society, association or organisation that is not carried on for the profit or gain of any member and has rules that do not allow money, property or any other benefits to be distributed to any of its members.Non-profit organisations can have profit-making activities taxed as business income in the normal way. These organisations must have written rules that meet certain criteria to get an income tax exemption.

 

 

2017-08-28T03:43:02+00:00