A common question for many businesses in the post-COVID age, Paul Cott looks at the most common business structures for tradies and explains the benefits, disadvantages and issues for each.

Firstly, we have a sole trader. As the name suggests, this is a structure where the owner acts ‘solely’ or on their own, perhaps engaging contractors on a permanent, semi-permanent or casual basis.

Whilst this form is great as you are your own boss and have full control over the business, it’s very poor for asset protection. That is, all the debts and liabilities of the business are the sole trader’s in their own individual name and so unpaid debts can send the business out of business altogether.

There is no separation between the debts, liabilities and expenses of the business and the owner. Debts that are unpaid can result in creditors attacking the personal assets of the owner (in particular, the family home) to pay the debts.

Lending can be harder to obtain if you are a sole trader in that banks are generally more reluctant to lend to sole traders as opposed to companies for the lack of asset protection for sole traders as mentioned in the previous paragraph. So outside finance to grow the business can be harder to obtain.

Tax rates are generally higher on personal individual income as opposed to say company tax rates. However, conversely, there are some advantages of a sole trader structure in that they are cheap quick and easy to set up, able to be set up almost immediately, and there are little to no ongoing costs (such as fees payable to ASIC) that must be paid.

You can still set up a separate business bank account (for the convenience of separating out the income gained through the business from other sources) and you can set up an ABN number and so in that sense gain some extra business legitimacy as well as for tax purposes.

The next possible structure is a partnership (eg. where the tradie and say their spouse set up a partnership, uncommon in this context though) and we won’t go into much detail on this structure as they are uncommon in the trade business. This business structure is normally preserved for professional services businesses such as lawyers and accountants.

Partnerships are a business where two or more people join together to run a profit-making business but they are a business where all debts, liabilities, losses and actions of one partner bind the other so that even if the other partner did not know the other partner was incurring debt in the name of the partnership, the partnership (and so both partners necessarily) is still liable. You will want to have full faith, trust and confidence in your partner to always do the right thing.

The other disadvantage of a partnership structure is that a written partnership deed or agreement should always be set up to establish the partnership itself and its internal rules, but it must be amended technically each time a partner enters, leaves the business or dies, as the law says that each of these events results in a new partnership being created.

Other features of a partnership include being again relatively easy and low cost to set up, the partnership has minimal reporting requirements (to the regulators) and each partner pays their own tax on their own share of the net income of the partnership and a tax return for the partnership itself must be done each year. I’m sure there is data matching between income reported by individual partners and the partnership income reported.

The last and far more common structure is a company. This is commonly seen in the industry where the builder operates the business in a working sense while another controls the administration work as the director of the company.

A company is a separate legal entity to its directors and shareholders and so regarding company debts, mostly (there are always exceptions in the law) directors’ assets cannot be attacked or obtained in order to pay for business debts, so they are an effective asset protection tool for business owners. The main exception where company debts may have to be paid by a director is where a company incurs debts when it is insolvent.

Now to a practical example of a particular business structure being chosen. A group of friends may combine to form a business say, as a company. In this situation, therefore, the business gains the benefits of the company form as described above and has the advantage of the combined skill sets, energies and resources of all the persons forming the company.

As friends, there is extra ‘skin’ in the game since the workers may have more than the business and its interests at stake. Additionally, since there are friendships involved, if things turn sour, there is that real potential for added animosity and emotional agitation about it, thus making things far more difficult to ‘separate’ out of the business amicably.

If a group of friends does wish to enter a business, then arguably they could (if the business to be run is to do a particular medium-to-long-term project) set up a joint venture. This form of entity is not common but it is designed specifically for where a one-off project is to be operated and where, after the project is complete, the participants go their own way and the rights, entitlements and liabilities are finalised on completion, once and for all.

The principles stated in this article are basic principles lawyers learn early on in their university education however they no doubt present some challenges for tradies when they are weighing up all the particular considerations for their own circumstances.

It’s therefore highly recommended that people seek professional advice (whether that be from a lawyer or an accountant or a financial planner, or perhaps all three as part of a ‘team of advisors’). The choice of the right structure through which to run a tradie business can set you up for life!