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19 Sep 2013

The legal identity of a business purchaser

In Australia a business can be purchased under a number of legal entities, this article will briefly discuss each one.

 

Sole Trader

A sole trader is a business in which the individual is considered the sole owner and therefore they are not considered a separate legal entity.  A sole trader may choose to have a business name or they can register a business name.  Operating as a sole trader can have taxation benefits.  In general  a sole trader is:

  • To pay tax as applicable to an individual
  • Responsible for gaining credit personally
  • Liable for any debts that the business incurs personally

 

Partnership

A partnership is a combination of two or more persons who purchase a business under a contract agreement.  A partnership is best understood as similar to a sole trader, however the responsibility is shared among the partners.  The level of responsibility or liability may be specifically outlined in the contract agreement.  Therefore in general a partnership is:

  • To pay tax as applicable to the individual
  • Responsible for gaining credit personally
  • Liable for any debts that the business incurs personally
  • Guided by the contract terms and Partnership Acts
  • Guided by strict conditions upon dissolution of the partnership

 

Private Corporation

A private corporation is considered a separate legal entity to the person.  In this case the following general rules apply:

  • Pay tax separately from the individual’s tax
  • Ability to issue shares
  • Advantage of limited liability (owner may not be wholly responsible for debts)

 

 

In each situation it is up to the individual on which legal entity best suits their business goals.  Usually a small business will start as a sole trader or partnership due to the smaller startup and setup costs.  A sole trader and partnership will also have the added benefit of being more flexible and allow the possibility of tax benefits.  A company entity is usually considered from slightly larger businesses in which it is preferable to separate the business from the individual for both tax and liability reasons.


In either case the choice is completely dependent on the individual(s) preferences.  For advice on what entity may best suit you, contact Alert Property Group.

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