Structuring a business and how to finance it

Building a business from the ground up is a daunting task for anyone, no matter how entrepreneurial they might be. Businesses take time, strategy, money and hard work. If you intend to start a business, you need to make some serious decisions about how you are going to structure your business in order for it to function as effectively as possible. So, where do you start?

Set-up costs

Set-up costs of a business will largely depend on your industry and whether your business has a physical location (for example, setting up an online-company will generally be a lot cheaper than purchasing a physical store). That being said, as a general rule, the business model you choose will either have a low-to-medium set-up cost or a medium-to-high set-up cost for that particular industry:

• Sole trader

Sole traders have generally low-to-medium set-up costs as there is only a single party involved in the business model and all risk is attributed to the business owner. If setting up a business with a physical location, this could prove higher for a single person. However, for online businesses, this structure would likely have the lowest overall set-up cost.

• Partnership

A partnership generally also has fairly low set-up costs (depending on the business model) as the parties involved split the set-up costs as well as any of the risks involved with setting up a business between themselves. Splitting the costs between partners may lower the overall set-up costs, particularly for businesses with physical locations.

• Companies

Setting up a company usually has a high set-up cost as companies generally have numerous directors and also employees. They may often also require external investment.

How do I finance my business?

In order to succeed, all businesses need some sort of capital. If you're a sole trader or in a partnership, you may be able to fund the business with your savings. However, this will entirely depend on your industry and on your savings as well as on factors such as how much risk you are willing to take. Most businesses will likely use financing options in order to minimise the risk as there are a number of lenders willing to loan to startups.

How you finance your business will vary depending on your industry and the structure of your business as well as on the amount of funding that you need.

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Sole trader and partnership financing options

As a sole trader or part of a business partnership, you will usually have to put up funding yourself. You can do this in a variety of ways:

• Secured business loans. A secured business loan is a loan that is secured against your personal assets, such as equity in your home or commercial property. The amount of money that you can borrow with a secured business loan is usually only limited to the value of the security that you can provide.
• Unsecured business loans. An unsecured business loan is a loan without the need for asset security. Unsecured business loans are usually available up to $1,000,000. However, lenders of unsecured loans might require your business to have been in operation for a certain period of time, such as six months to a year. They may also require a minimum annual turnover, so if you're just starting out, you might not qualify for an unsecured business loan.
• Invoice financing. If your business provides goods or services B2B and you issue invoices, you may qualify for invoice finance. Invoice finance gives businesses access to the capital tied up in their unpaid invoices, either as required or as a revolving line of credit. Some invoice finance providers may require a minimum annual turnover and operation time, but others may not.
• Crowdfunding. Some small businesses may be able to get partial or full set-up funding from crowdfunding projects online. You will need to have a very well thought out business plan and may benefit from offering some sort of incentive.

Companies

As companies generally have higher set-up and maintenance costs, the funding might be slightly different. While the above options are all available to companies, additional funding routes are also available:

• Venture capitalists. Venture capitalists are groups of people who invest in startups with the intent to acquire shares in the business and to see a large financial return.
• Angel investors. Angel investors are individuals rather than groups who invest in a business in exchange for business shares. An angel investor will tend to have a more active role in running the business and helping it to succeed.

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• Small business loans
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How do I register a company?

Whatever company structure you choose, you will need to register it officially somehow. This process will differ depending on which company structure you opt for.

Before registering a business, you will have to come up with a business name. The cost for registering a business name is $34 for one year of $75 for three.

• Sole trader

Registering as a sole trader is a fairly straightforward process. All you need to do is acquire an ABN (Australian Business Number), which you can do directly through the government website.

• Partnership

You can also register a partnership through the ASIC (Australian Securities and Investments Commission) website. This business structure may be more difficult to change than a sole trader set-up.

• Company

A company can be registered as either a public or a proprietary company, which you can also do on the ASIC website. Companies take more time and energy to register than sole-trading organisations and partnerships as there are more legalities involved.

Who's in charge?

Who has control over a business will differ depending on the business's structure. Some people might want full control over the industry, whereas others would prefer to let employees or partners take the reins.

• Sole trader

Sole traders have complete control of their business since they don't have any employees, owners or investors.

Having full responsibility of a business is in many ways a positive. However, it could also mean that your personal property could be on the line if anything were to go wrong since you would be personally liable for the business in all circumstances.

• Partnership

Partnership business structures generally have an equal distribution of power within the business. However, this means that if someone doesn't hold up their end of the business, you will still be personally liable.

• Company

For those who start companies, there is a much broader scope for who can be in charge and who takes responsibility if something goes wrong. The directors of the company may or may not be shareholders. If it's a proprietary company, less than 50 non-employee shareholders are permitted. A public company can have more than 50 non-employee shareholders.

Generally, as a director of a company, you would have less control over the business than you would if you were a sole trader or in a partnership since you will have to answer to other directors and also to shareholders.

Directors of the company can be held liable for any negligence within the company, but shareholders who are not directors have no legal obligations if, for example, the company is sued.

How much tax will I pay?

Different business structures will face different tax laws.

• Sole trader

As a sole trader, you will be taxed as per your personal income, so essentially the same as if you were working for somebody else. However, you will be able to deduct any business-related expenses at the end of the financial year when you file your individual tax return.

• Partnership

As a partnership, you will be expected to file a partnership tax return as well as an individual tax return. The amount of tax you will have to pay will be based on how you have distributed the profits and losses from the business between yourself and your partner(s).

• Companies

Companies are generally subject to a base tax rate of 27.5% of the profits. This tax is totally separate from your personal income (which you will still pay tax on as standard). Companies may also qualify for offsets, tax concessions or rebates, so it's a good idea to have a decent accountant.