What legal structure should you pick?

You should definitely talk to your accountant before making a decision about your legal structure, because there are trade-offs and compromises to make on each.

As a general rule, the legal structures I most often see are:

• Sole trader with or without an ABN
• Partnership
• Proprietary Limited company Pty Ltd
• Incorporated association Inc

However if your accountant can't talk to you about more than just tax and debts then you should seek better advice.

Trusts aren't legal entities

The classic phrasing is that a trust is a disbursement of funds which doesn't mean much to most people. What the phrase means to say is that a trust is merely a way of allocating money among its beneficiaries - the trust itself isn't a corporate person and can't sign contracts or undertake work. Another description would be that a trust is a fancy bank account; it's the bank account owner who puts money into it.

Instead the trustee (whether a natural person or a Pty Ltd corporation) is the legal entity who bears responsibility for the actions of the company.

So which is best?

Conventional wisdom is that a Pty Ltd company provides legal protection to directors and shareholders, since it's the company "itself" which is bearing debts and taking on risk under contracts and agreements.

Though it's never that simple.

There are two major trade-offs to consider:

1. Technically, the company is its own entity, and its directors need to consider its own best interests, rather than the best interests of the directors. This means that the directors need to ensure that the company is solvent at all times, and that the company's own longevity is maintained. Directors can be sued by ASIC if they treat the company as a personal piggy-bank.
2. Directors are personally liable under the Corporations Act for breaches of 1., and other sections of the Act including occupational health and safety, pollution, employment law, and the like. Ignorance is no excuse - even if you're explicitly the admin director not the operations director, you're just as liable as other directors for any breach.

It's all risk management

So talk to your accountant about more than just tax & GST - ask if your business set-up is providing you any personal protection against debts and civil penalties. The decision is never straightforward, but if you ask early on, you can get your structure right and potentially save yourself quite a bit in the long run.

Using decades of experience in start-up, established, and large corporate risks, I can give you no-nonsense business advice to avoid problems before they occur.