Day 17 – Business Structures: Sole Trader and Partnerships

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Hi Victoria here from The Bookkeeper Hub, HBA Encompass, and author of Zest for Success.  I’m back in my car studio.  I’ve just turned the car back on because I was absolutely cooking some.  I’m hoping the audio is gonna come through okay.  So far, we’ve talked about in our journey to grow your business or to start your business.  We’ve spoken about a general overview of things that you need to do.  And we’ve done general overview of marketing.  We talked about our target market and the consistency and branding and things you need to do.  The next thing we need to talk about is business structures.  That’s something that is best set up before you actually start spending money and before you start your business.

Now, I’m gonna talk about Australia business structures here because that’s what I know about.  I’m sure that there are similar ones overseas but I don’t have that knowledge so all I can talk about is what I know.  So as you’re aware I’m an accountant.  Business structure is what we do regularly for our clients where we work out the best structure for them.  We look at the capital gains implications.  We look at the ease and the simplicity of setting it up, the cost of setting it up, and things that are gonna work with you for the length of your business depending on your industry.  So let’s go ahead and just do an overview of the different type of business structures that you can have.  So the first one is a sole trader, which means is you, in your name.  You can get a business name registration from ASIC if you want to call yourself Dave’s Plumbing rather than Dave Smith.  That’s fine but at the end of the day if you’re a sole trader, everything comes back to you.  The buck stops with you.  Everything is in your name and it means that any other assets that you have can be linked to your business.  If something’s gonna happen in your business and someone is gonna sue you, it means that your house, your car, your boat, everything that you own is in the line.  The good news about a sole trader is that it’s really simple and cheap and easy to set up because it’s just a matter of you going to the bank, opening a bank account, getting on the ATO website, and creating ABN number.  So very easy and very simple to start.  The next one up the scale is a partnership, where there’s either two people or two other entities that join to work together to run a business or to own something.  Now a partnership agreement is always recommended for a partnership.  I’ll get unto that in a sec but you don’t actually have to have a partnership agreement.  You can have an agreement, a verbal agreement with someone to be their partner and there’s a common law that says your partner, it’s a partnership.  You don’t need to have that agreement.  What that means is that then the name would be Bill and Bobby Smith.  And then Bill and Bobby Smith can go and get a business name registration and call themselves Smith’s Plumbing, that’s fine.  But what it means is very similar to a sole trader is that each individual all their assets are on the line with your business and not only that just to make a little bit scarier is that both parties or both partners are responsible for whatever the other partner does in the name of the partnership.  So if we have Bill and Bobby and their Smith Plumbing and Bobby goes out and buys a new car and doesn’t make the repayments on it but puts the car in the partnership name, it means that Bill is required to make the payments.  And if he doesn’t, then Bill’s boat, house, and everything else is on the line when the bank comes looking for the payments.  So partnerships without a partnership agreement are free to set up, easy to run, easy to manage, but there’s a massive risk on your own personal assets.  As I’ve said before, you can create a partnership agreement and usually a solicitor will set one of those up and that’s where you list who is responsible for everything, what happens if one wants out of the partnership, and all those kinds of things.  Partnership agreement is really important.  And wasn’t I telling someone this morning that my first uni lecture the lecturers said to me never go into business of anyone you’re not prepared to marry and even then think about it.  So partnerships are great but partnership can fall apart really quickly and really easily.  Good mates and families have been blown up over partnerships without partnership agreements.

That’s all for today tomorrow I’m gonna go ahead and talk about trusts and companies which are the other two business structures.  See you tomorrow.

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