Types of business structures: how to choose the right one for your business
Your business structure affects the tax you pay, and your level of liability under the law.
What is a business structure?
By ‘business structure’, we’re talking about the legal structure of a business. The main types of business structures are sole trader, partnership, and company.
Choosing a business structure for your small business affects your admin burden, your business’s taxation, legal status, daily operations, and your personal liability.
The risks of not choosing a business structure
If you don’t formally choose a structure for your business, you may face:
- Unlimited personal liability: Your personal assets – such as your home or savings – could be seized to satisfy business debts or legal judgements. Here’s more about personal liability.
- Tax implications: Your personal income and business income will be treated as the same, so you might pay more tax than you need to.
- Difficulty raising capital: Potential investors and bank lenders might be discouraged if you don’t have a formal business structure.
- Limited growth potential: Have visions of expanding? To make significantly higher sales? Your scope may be limited without the right business structure.
What happens if you don’t choose: default business structures
If you don’t specify a structure, your business will be categorised by default to the simplest form of ownership recognised by the law.
Can you change your business structure?
Yes – you’re not locked into one structure. Many businesses start out as sole traders or partnerships and grow into companies. You might change your business structure if the business grows and you take on more complex projects with more financial or legal risk.
Simplify your business finances with Xero
Choosing the right entity for your business is just the start of building your company.
Xero software streamlines your financial admin so every step of the process is faster – whether it’s sending invoices, managing cash flow, or creating customised reports.
Automatic calculations always put the latest numbers at your fingertips, while Xero’s cloud-based platform means everything you need is in one secure, accessible place. Less admin means more time for the rest of your business. That’s why small businesses love Xero.
Disclaimer
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.
Download the guide to starting a business
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1. Research your idea
Your business idea is clearly inspired. But it helps to check you’re not the only one who thinks so.
2. Write a business plan
It helps to map your way from having a genius idea to a real business. Your plans don’t even have to be long.
3. Do a budget
You’ll need a rough financial plan so let’s estimate costs vs. sales, and figure out your break-even point.
4. Set prices
Work out what you need to charge to cover costs. And choose a pricing strategy that works for your business.
5. Choose a business structure
Will you be a sole proprietor, a partnership, or a company? And what's the difference anyway?
6. Sort your startup accounting
Get a few things right at the start and you’ll be sweet when it comes to tax time. Let’s demystify accounting.
7. Register your business
Find out who you have to tell about your business. And check to see if your industry is regulated.
8. Create a website
Learn what goes into a website. It’s simple and a great way to get discovered.
9. Get extra support
Once you’ve learned how to start a business, you’ll want help running it. Check Xero’s guides and templates.
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