While the financial benefits of being a sole trader are more enticing than those of being a private company, the business risks can be scary. Gavin Dixon explains why setting up as a private company is a business owner’s best protection from liability.
The biggest decision many young, aspiring entrepreneurs faced when setting up the lemonade stand was whether to charge five or 10 cents a cup. Sure, you needed enough lemons, water and sugar but the dilemmas were few and business was even fun.
Setting up and running a business as an adult with a lot more riding on the outcome isn’t quite so simple. Locating suppliers, hiring staff and securing property, not to mention whether the business will be selling shoes or surfboards or servicing cars or computers, is just the beginning. The list of other obligations is lengthy but perhaps none are more important than the myriad of legal trade issues facing today’s business owners.
Once an entrepreneur has selected the type of business, how should it be structured? Is it best to work as a sole trader or establish a partnership, a private company or a public company?
Sole traders own and operate the business in their own name. As such, a sole trader takes on the full responsibility of the business’ actions, possibly also for its staff as well as the quality of products and services. Operating as a sole trader is enticing: the profits don’t have to be shared with partners, employees or shareholders. There are no costs to establish the business and there’s a lot to be said for being your own boss. On the flip side, the owner is solely responsible for all liabilities, agreements with customers, contracts and yes, anything that goes wrong.
Partnerships, which typically materialise when individual entrepreneurs pool their resources to establish a business, enjoy similar benefits but accordingly, share similar liability.
The most practical way for a business owner to limit risk is to establish a private company. Yes, there’s a cost (about $400 if you do it yourself) to go this route as well as ongoing compliance expenses, but it’s a small price to pay for insulating the business owner from potentially devastating liability.
In contrast to sole traders and partnerships, private companies are considered separate entities from their owners. As a general rule, the owner’s personal assets are not exposed in the event of litigation. Companies, both private and public, are also taxed at the lower concessional rate of 30 percent. The decision to register as a private company would thus seem logical yet it’s one many business owners don’t consider. Why? Most are so entwined in the daily operations of their business, little thought goes into managing the firm.
Before any decision is made on the best structure for the business, consult with a solicitor, accountant, or business coach, or all three. Each can recommend the most effective vehicle for which to launch and operate a business as well as providing an invaluable, objective opinion on the best way to do it.
Once a business name has been selected and registered, an ABN obtained and business structure selected, focus on quality of product, intellectual property and truth in advertising. In some cases trade practices, law requires that goods sold to consumers must be of ‘merchantable quality’. That is, they’re required to satisfy a basic level of quality and performance based on the price and description of the product. Similarly, the goods must be suitable for the purpose that the buyer expressed to the seller when purchasing the product.
Gavin Dixon, CEO of Reckon Limited’s Business Division. Reckon is the supplier of QuickBooks accounting software (www.reckon.com.au).
