There are four main types of business structures used in Australia – sole trader, partnership, company and trusts. Each one has its own set of advantages and choosing the right one at the start is important, as it impacts your tax obligations, registration and legal liabilities. You can change your business structure as your business needs change, but before you choose one, think about the following:
– What are your revenue goals?
– Do you want a small one-person business or will you need staff?
– How many employees will the business need in the future?
– Will you be the only business owner or are you considering bringing in business partners later?
– Will you need capital to grow the business?
Below is a summary of each of the most common business structures, to help you decide which one is right for you.
1. Sole trader
A sole trader, as the name implies, is just yourself who owns and runs your business. It is the simplest and cheapest way to set up a business and all that is required to begin, is an ABN, which we can assist you with obtaining.
The ATO do not distinguish between your personal finances and business finances in a sole trade structure – they are the same. This means you are responsible for all debts and liabilities incurred by the business. Should any financial problems occur, you may be putting your personal assets at risk.
Key points:
- You cannot be an employee of your business as a sole trader.
- You must register for GST if your revenue is above $75K per annum.
- You can employ others, but you must pay the required payroll obligations, including11% superannuation contributions. You are also responsible for your own superannuation fund contributions.
- The business income is treated as your own income.
- Any losses incurred by your business can be offset against other income earned.
2. Partnership
A partnership requires two or more people to run the business. With a partnership, you jointly share the financial liabilities, responsibility and successes of running and growing the business.
Key points:
- A partnership is not a separate legal entity. Each partner is liable for all debts and tax obligations of the business.
- The partnership doesn’t pay tax. Each partner is responsible for paying tax on their share of the income.
- Each partner can offset any of the business’s losses against other income earned.
- Each partner is responsible for their own superannuation fund contributions.
- Inexpensive to set up and run, with less annual reporting.
3. Companies
A company is a separate legal entity which is operated by its directors and owned by its shareholders. A company’s assets and income belong to itself, not to its shareholders. The company has its own legal rights and responsibilities which means the shareholders personal assets are protected, and creditors cannot sue shareholders.
Key points:
- This business structure gives you greater access to capital with more asset protection, but will require an initial set up fee for the establishment of the company.
- Income and assets earned belong to the company.
- Business operations are controlled by directors and owned by shareholders.
- There are more tax reporting and legal obligations, and more administrative responsibilities each year.
4. Trusts
A trust is essentially an agreement where one party – the trustee – has the responsibility of holding and managing assets on behalf of its beneficiaries. Therefore, a trust separates legal ownership of assets from the beneficiaries, which increases asset protection.
There are many types of trusts in Australia and the most common used in business is a discretionary or family trust or a unit or fixed trust. These offer more flexibility in distributing profits to beneficiaries and increased asset protection.
Key points:
- Trusts have more administrative responsibilities and therefore come with a cost to set up and manage.
- Profits in a trust are distributed to beneficiaries, who are then responsible for paying tax.
- Provide asset protection and reduce personal responsibility for debts and liabilities.
- Easier to manage.
- Profits are distributed annually to beneficiaries who pay tax individually.
- Trusts typically do not pay tax, provided they distribute all the profits.
Call the team at Colledges for professional advice to set up the right business structure
Our team of qualified and experienced accountants will ensure you start out on the right track. Call us on 03 9851 6500 or email us at hello@colledges.com.au for advice on the type of business structure you need, or if you are considering making changes to your existing business. We’ll help you make sound and profitable decisions for your current needs and to ensure you’re prepared for your future growth.
