Original post by Suncorp
Understanding the different ways business entities are structured can help you when submitting a small business loan application, by acknowledging all the information lenders need to make a decision.
If you’re looking to apply for (small) business finance, read on to familiarize yourself with the range of ways a business can be structured.
This is important because it can have a significant effect on how much you / your business entity can borrow, the sureties you need to provide and the range of due diligence activities you’ll need to complete when putting a finance application together with your broker.
These are the four most common business structures.
1. Sole trader
A sole trader is just as it sounds: a single individual trading under their own name who is responsible for controlling assets and making business decisions. They’re entitled to all of the profits from their enterprise after tax and are liable for any losses and debts. An ABN is required, and income from the enterprise is reported on the trader’s personal tax return. It’s a structure that’s simple to set up and operate.
A partnership enables a minimum of two people and a maximum of 20 to operate a business together. It operates in a similar way to a sole trader business. Partners are jointly entitled to profits and jointly liable for losses and debts. Partnerships require their own ABN and tax file number.
3. Proprietary company
A company is a separate legal entity, owned by shareholders, that can incur debt, sue and be sued. It’s a structure that allows owners to limit their liability and not be held financially responsible for losses. Companies must be registered with the Australian Securities and Investments Commission and have at least one director who is responsible for the day-to-day running of the operation. Companies are more expensive to establish and operate than partnerships and sole trader enterprises and have more complex reporting requirements.
Trusts are entities that allow trustees to carry out business on behalf of trust members, who are known as beneficiaries. Established for reasons ranging from managing and protecting assets to controlling distributions and decreasing tax, trusts are established via trust deeds and are not legal entities in their own right. Discretionary trusts are typically used to operate family businesses, while unit trusts allow a greater number of individuals to pool their funds for a common investment. Trustees are liable for any debts incurred by a trust.