What is the Best Business Structure for a Tradesman Wanting to Start their Own Business?

business structures for tradies

If you’re a tradesman contemplating going out on your own, there’s probably a bunch of things going on in your mind, one which may be how do you legally set up your business?

Integral to that question is what business structure you should consider. Should it be a company, a partnership or a sole trader? Well, to find out more, Elisha Hodgson, a lawyer at OMB Solicitors discusses the topic.

TRANSCRIPT

Dan: Elisha, where does a tradesman start in their thinking about this structure?

Elisha: That’s a good question. Really, before you even start thinking about what business structure might be right for me, I think it’s important that you think about what are the traits of my business and what do I want to achieve in the next 5, 10, 15 years? Are you looking at employing more people? Are you looking at expanding the business quite rapidly? What is the size of your business and I guess what are similar businesses in the industry doing themselves?

Elisha: I think those sorts of questions you need to ask yourself just before you even think about the type of business structure because, really, there are a lot of options. It will come down to what is most suitable to your personal circumstances, whether that be reducing your tax is important to you, or if you’re looking at limiting liability. Those are the sorts of things that you need to start thinking about before implementing any business structure.

Dan: I’m assuming that most tradesmen would be thinking that, okay, sole trader is probably the easiest because it might not incur as much cost as perhaps setting up a company, etc. Is that your experience?

Elisha: Yes, definitely. It certainly is one of the most popular options amongst the tradies, especially those at the subcontractor level with not many staff.

Elisha: But as a sole trader, you are the business, so you have control of everything, which makes up that business. It’s quite quick and easy to set up, there’s not a lot of ongoing accounting obligations, as opposed to some of the other business structures. So, yes, certainly it is quite a popular option amongst the tradies.

Elisha: But, like all types of business structures, there are some advantages and disadvantages. I think that’s what each individual needs to weigh up in their own circumstances.

Dan: For a sole trader, what would be some of those risks? I’m thinking that are they protected should the business go bad, and they’ve got people that want to chase them for money?

Elisha: Yes.

Dan: Are they protected in that case?

Elisha: Well, certainly the other sort of business structures, such as a company, would provide a higher level of asset protection.

Elisha: As a sole trader, one of the key risks is that you are the business, so any loans, credit facilities, supply guarantees, and any other debts or liabilities that you incur in running that business could potentially and generally does become the personal responsibility of the individual sole trader. Really, if things start going pear shape, then you don’t have that extra level of asset protection that something like a company structure would provide, so there are risks.

Elisha: I think it’s important that, depending on the amount of staff that you have involved or the level of risk put in your individual business, I think that’s something that you have to weigh up in terms of whether or not to stay in the sole trader position, which is the most common, or if they want to transition to it something a little bit more sophisticated, like a company or a partnership or a trust sort of business structure.

Dan: Elisha, it probably makes sense for a tradie prior to making a move to get advice. Because I was just was thinking that whilst it’s okay for us to have a discussion around this, and we’ve got reasonable knowledge about what the structures are and the risks and opportunities, does it make sense to consider all those options in consultation with a lawyer?

Elisha: Yes, certainly. I also think seeking advice not only from your lawyer, but also an accountant would be appropriate as well. I think in consultation with all parties involved and having considered what you want to achieve with your business longterm, I think having a roundtable discussion will really seek to achieve great things for your individual business in terms of asset protection, even tax savings, and also just the general progression of your business, particularly if you want to expand with your business.

Elisha: This is certainly the case if you start talking about some of the other business structures like partnerships and companies and the like, and even trust, you certainly would want to be seeking legal advice quite early on, particularly when you start coming to drafting a trustee or shareholders agreements or partnership agreements.

Elisha: Those sorts of things might be quite foreign to a tradesman; however, that’s where our level of expertise can come in and really assist the business in achieving what they want to do.

Dan: Elisha, thanks for joining me.

Elisha: Not a problem. Thank you.

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