Relationships Between Business Owners - Company vs Other Models

Posted by Luke Mitchell on 13 April 2016
Relationships Between Business Owners - Company vs Other Models

In our last blog, we outlined the importance of a new business putting into place a clear ownership strategy right from the start.

While sole trader and partnership structures have historically been commonly adopted ownership models, they have become less common place in recent years.

 

The company model, often in conjunction with a trust, has become a very popular ownership structure.

Because the law treats a company as a separate legal entity to each of its individual owners, companies offer a number of advantages over the sole trader or partnership models:

  • limited liability – sole traders face unlimited liability, while each of the partners in a partnership not only face unlimited liability, but are also jointly and severally liable for all aspects of the partnership;

  • protection of personal assets – because there is no separation at law between sole traders (and individual partners in a partnership) acting in connection with their business and acting in their personal lives, any assets owned (for example, the family home) are at risk;

  • a flat rate of tax;

  • a degree of flexibility in allocating income through the company's shareholding structure, particularly when a trust is used;

  • a degree of flexibility in the treatment of start up costs through, for example, the recording of shareholder loans.

In our view, the advantages of the company model over the sole trader and partnership models are such that, other than some profession-specific requirements (many of which no longer apply in any event), the company model will be the best model for the vast majority, if not all, businesses.

When done with the right professional advice, the incorporation of a company is a quick and relatively straightforward process. We place great value on our role as trusted advisers to our business clients and believe that that relationship begins with providing the right advice about the best ownership structure before the business begins.

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