Sole Traders If you want to start or purchase a business - or have an existing business - you may want to know the best ownership structure for you to use. We'll talk about the three main business structures in Australia and NZ - sole trader, partnership and company - and please email me if you want to know more. The first is that you don't have to stick with the same structure - you don't have to form a company to buy a company, for example. A company can buy a partnership, a sole trader can buy a company and so on. Or, if you're currently a sole trader, you can turn it into a company; a company can be wound down and turned into a partnership. There is, of course, cost and hassle in making these changes so let's get it right, now, and have your money and effort directed at productively running a business. Personal Liability So, you start or buy your business, paying from your personal bank account or a separate business account and, from whatever account you use, you make business purchases - assets and expenses. This is exactly like making private purchases. If you don't repay your mortgage, the mortgagor can sell your house and then sue for any shortfall and you can lose other personal assets. The same with your business: if your business spending is on credit and you don't pay, the creditor, lender, mortgagor or bank can sue you and get the court to take ...
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Partnerships Partnerships are strange beasties - ferocious in failures and tricky for tax. The first strange thing about them is that, while us accountants recognise them - we do sets of accounts for them - the law does not see them. Legally, they do not exist. Partnerships can't borrow anything, sue or be sued, lend money or sign contracts. The legal world doesn't know they exist. So, if
you're in partnership with Kath and Kim, how can your business borrow
money if it does not exist, legally? It can't. To raise money or do
anything else legally, the individual partners have to do it - each of
them, personally. So you raise some money, Kath raises some money and
Kim raises some money and you put all your money together and so the
business has money. Personal Liability What usually happens, in practice, is that creditors choose one partner ...
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Companies The first thing is that companies are like superman: they can do all sorts of amazing things but you'll never actually see them doing anything. They're invisible. Companies are figments of lawyers' imaginations, really, in that the law recognises them - they are legal entities and can own property, sue and be sued, sign contracts, borrow money and so on. Partnerships, as you read last week, cannot do any of these things. Though companies can do these things, you'll never see them fishing on the Murray River or sunbathing at Bondi Beach - you'll only see things they own and owe and the effects of their actions. Secondly, we're only talking about proprietary (private or Pty) companies, here, and not public companies. Separate Identity In the 1950's a topdressing pilot in NZ owned 99% of his topdressing company and his accountant had one share. One day his plane fell out of the sky and the sudden stop at the bottom killed him. At the time there was the Workers Compensation Act and you had to prove a master-servant relationship to claim on it. His bereaved wife claimed, successfully, because though he effectively owned all of his company, he was also an employee of it - he was a servant of the company he owned. So,
you can be both an owner and an employee of your own company, which is
why you can draw a wage and/or dividend, while sole traders and
partnerships cannot. Limited Liability
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