How to choose a legal structure for your design business
In this post I go through the different options you have for the legal structure of your design business and how to choose the right structure for you.
Disclaimer :)
Before we start I want to remind you that I am obviously not an accountant or lawyer.
The tips and steps I give you in this post are based on my own experience of setting up a number of different businesses over the last 10 years. I can give you steps and an overview of the different decisions you are going to need to think about but remember that you have your own unique financial and personal circumstances so you will need to get your business set up in a way that works best for you.
As such the information in this post is for information purposes only and does not constitute professional legal or accounting advice. I strongly suggest you find an accountant who can help you get your business structure set up correctly and make sure you have registered with all the correct government agencies – like ASIC in Australia.
I can also only give you information based on my own experience of setting up companies within Australia. So if you are outside of Australia your circumstances will be different to mine and its therefore even more important that you seek your own professional advice.
OK now we’ve got that out of the way – let’s get stuck in ;)
Choosing a legal structure
Choosing the legal structure for your business is one of the most important early decisions you will need to make. But it can be confusing to know which avenue to go down as there are multiple options – each with different pros and cons. I know when I was first starting my business I had no idea what the different options meant or which one I should be choosing!
Many early stage design professionals don’t make a clear decision on this when they are getting started and essentially end up just merging their personal and business interests, not realising that this leaves them exposed to personal risk and is also not legal in a number of cases.
If you are serious about getting your business up and running – which I know you are as you are reading this post! – then getting it properly structured from the start is really important.
I strongly encourage you to seek advice from your accountant or lawyer on which structure is right for you to get started with as each person has circumstances unique to them and each structure has different tax benefits and levels of risk to you personally.
In Australia there are a range of different options to consider when structuring your business. In this post I am going to talk about the three that you are mostly likely going to be choosing between:
✅ Sole Trader
✅ Partnership
✅ Company (Pty Ltd)
Let me go over each of these briefly for you next.
Sole Trader
This is your simplest way of getting started in business as well as the least expensive as it requires very little up front set up costs and fewer reporting requirements.
This structure works for people who are doing business on their own and many design professionals get started in business as a sole trader given it is quick and cheap to set up and an easy structure to maintain.
However, as a sole trader you are personally legally responsible for all aspects of your business and as such this puts you and your personal assets (for example your home or other assets you own) at risk if things go wrong and you cannot repay your business debts or get sued for an error by a client and can’t repay the associated debt. This is not the case in other business structures that we will look at later. You also pay tax on your profits at your marginal tax rate, which may be higher than the company tax rate.
A good thing about starting out as a sole trader, however, is that disbanding is relatively easy and you keep any after-tax gains if you end up selling your business. So setting up as a sole trader can be a good place to start if you want to avoid set up costs. Just be aware that this business structure does limit opportunities for expansion as your business grows and doesn’t have as good tax benefits as some of the other business structures.
If you set up your business as a sole trader:
You use your individual tax file number to lodge your tax returns
You don’t need separate bank accounts (although it is recommended that you do open one for your business affairs as it just makes keeping track of things much easier)
Your personal assets (e.g. your house) are at risk if things go wrong
You can employ others
You are responsible for your own superannuation
To set up as a sole trader in Australia here are the steps you’ll need to take:
register your business name with ASIC
obtain an Australian business number (ABN)
you may also register for Goods and Services Tax (GST). This is optional until you are earning over $75,000 per year (accurate at time of writing this post)
Set up separate bank accounts. You will find it easier to manage and reconcile your business affairs with a separate bank account dedicated to this.
One thing to note is you can set up as a sole trader and then form a company later on if you wish – but just discuss this option with your accountant as it does come with pros and cons in relation to tax benefits.
Partnerships
A partnership is a common business structure that is made up of two or more people who will share the income (or losses) between themselves. A written partnership agreement must be established to make sure that all partners have a clear understanding of their rights and responsibilities within the partnership. This can be drawn up by your lawyer.
Like with sole traders, partnerships are relatively easy and inexpensive to set up and have less reporting requirements than some other structures. The people involved in the partnership will share control and management of the business and each partner pays tax on the share of the net partnership income that each receives.
Partnerships must apply for an ABN and use this for their business dealings. And they must also register for GST if turnover is more than $75,000.
Be aware that each state and territory in Australia have their own partnership laws so make sure you seek good advice if you are planning on setting up a partnership structure. And also make sure you are aware that if you enter a partnership you are individually liable for debts incurred by other partners you are in business with. This means that in partnership structures you are offered little protection if things go wrong.
The steps for setting up a partnership are similar to that of a sole trader but if you are considering this structure I strongly suggest you seek legal and accounting advice in order to make sure you have a solid partnership agreement in place, given the risks involved in going into business with other people. You also want to make sure you have a very detailed understanding of your partners’ financial situation before you go in to a partnership with them. Unfortunately I have seen a lot of partnerships go wrong, so go in to this structure with your eyes wide open!
Company
Unlike the other structures we have looked at so far a company is a distinct legal entity that is separate from its shareholders or officers.
In Australia the main company types are public companies (which are traded on the stock exchange) and proprietary limited (Pty Ltd) companies, which is what we will be looking at here. Having a company, rather than operating as a sole trader or partnership has a level of credibility attached to it along with a range of other benefits.
I personally think that if you’re serious about starting and growing your business then you should strongly consider setting up a Pty Ltd Company. The benefits of a company structure is that you, personally, have limited liability for any debts or issues that the company has, which means you are unlikely to destroy your personal assets if something does go wrong with the company.
However, you may still be held personally liable for being in breach of your legal obligations as a Director. All company officers and directors must comply with legal obligations under the Corporations Act 2001, which is governed by the Australian Securities and Investments Commission or ASIC.
The downside of setting up as a company is that they are more expensive and complicated to set up and have costly ongoing administration charges, due to their in depth reporting requirements and extensive record keeping. This structure is good for people who are more committed to getting started with their business or know that they will be in business over the long term and likely to make good money in their business. An additional benefit is that you will be able to draw a wage/salary out of a company and then take sick and holiday pay, unlike in the sole trader structure. Plus there are other tax benefits as well.
As setting up a company is more complicated than setting up as a sole trader I would highly recommend you seek assistance with this in order to make sure you get this right and do it correctly.
To set up a Pty Ltd Company in Australia the steps you’ll need to take are:
Obtain an Australian business number (ABN)
Choose your company name
Register your company with ASIC, prepare company constitution
Register your business name
Register your company Tax File Number
Register for Goods and Services Tax (if required – discuss with your accountant)
Set up your business bank accounts (you’ll need the above steps to be undertaken before you can do this)
How to choose?
So those are the three main business structures that I think you are likely to be choosing between for your businesses.
There are of course other structures like trusts or even not for profits, so if you are considering these options then you are best to seek advice on these given they are more complicated to go in to here.
When I was first starting my business I had no idea about the pros and cons of the different types of business structures so I hope this overview has given you some confidence to start thinking about how you will structure your own business.
But I do highly recommend you seek advice from an accountant before you make any decision in relation to your business structure. An accountant will be able to help you maximise your personal asset protection and reduce your personal liability, plus help you minimise tax exposure and help you comply with all the legal requirements you have for setting up and maintaining your business.
Finally, if you are just starting your design business you may find my business course bundle ‘Start your Design Business’ helpful. You can find out more about it here >>>
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Enjoy the rest of your day!
Clare x
Dr Clare Le Roy
