Starting a new business can be not only be daunting, it can also be very confusing. If you’re investigating the different types of business structures, you may find yourself in one of two situations:

  • You’re starting a new business and need guidance on the best way to structure it; or
  • Your business is undergoing a period of change and your current structure no longer suits the business operations.

There are a range of factors that need to be considered when choosing the appropriate business structure. From initial start-up costs to long-term asset protection, each factor plays a large role in determining the best structure for you at that point in time. It’s important to remember that business structures can be changed almost instantaneously, however the structure needs to be suitable for the conditions the business is experiencing today.

One of the key decisions you’ll make when starting a business is its structure. Your choice of structure will depend on the size and type of business and how you want to run it. Each structure may have an impact on key areas such as tax you’re liable to pay, asset protection and costs to set up.

There are several structures that you can choose from when starting or expanding your business including:

  • sole trader – the simplest structure, gives you full control
  • company – more complex, limits your liability because it’s a separate legal entity
  • partnership – made up of 2 or more people who distribute income or losses
  • trust – where a trustee is responsible for business operations

How to choose a business structure

When you decide on a structure for your business, choose the one that best suits your business needs. Consider each option carefully, as there are key factors and rules to consider for each structure.

Your business structure can determine:

  • the licenses you require
  • how much tax you pay
  • whether you’re considered an employee, or the owner of the business
  • your potential personal liability
  • how much control you have over the business
  • ongoing costs and volume of paperwork for your business

You can change your business structure throughout the life of your business. As your business grows and expands, you may decide to move to a different type of business structure.

Most Common Business Structures in Australia

Sole Trader (Individual)

The Sole Trader structure is most appropriate for small business owners, especially when the business’ operations are based on the owner’s personal skills and talents. They often trade with the owner’s name or they can register a business name (e.g. Jenny’s Automotive). Many businesses begin their journey as Sole Traders due to the simplicity of set-up procedures, low costs and the owner maintaining all the control.

Partnerships

Partnerships are a formal arrangement by two or more parties to manage and operate a business collectively. In this structure, both risks and rewards are shared by each of the partners. A partnership has its own Australian Business Number (ABN) and Tax File Number (TFN). For security purposes, it’s recommended that the owners develop a Partnership Agreement to explicitly set out the terms and conditions of the partnership.

Key Features of the Partnership Business Structure:

  • The Partnership structures allows for different skills to be pooled together
  • Profits and losses of the business are shared amongst the partners
  • The Partnership automatically dissolves on the death of one of the partners
  • A Partnership must lodge an Income Tax Return, but the Partnership does not pay tax
  • The taxable income or loss is distributed to the Partners according to the Partnership agreement. If no agreement exists, income and losses are split equally among the partners. The partners individually pay tax on their share of taxable income and any other income they may have
  • Unlimited liability – each partner bears the total responsibility of the business liability if other partners are unable to fund their share
  • Like a Sole Trader structure, partners cannot be employees of their own individual partnership – so they don’t receive a wage or the minimum superannuation guarantee. Partners can make personal concessional (deductible) contributions up to the annual limit

Companies

Companies are legal entities that are formed by either individuals or a group of individuals to engage in and operate a business. In Australia, there are two types of companies: Public and Private. Private companies are more common in comparison to public companies – purely due to the increased regulation & reporting requirements that need to be fulfilled for public companies. Public companies can be (but don’t have to be) listed on the Stock Exchange. Company shareholders own the business and directors are appointed to manage them.

Key Features of the Company Business Structure:

  • Companies are separate legal entities. The assets and liabilities owned by the company are separate to company directors and shareholders. This is a feature that attracts business owners to this structure
  • Company profits remain in the business until they are paid out to shareholders
  • The company is required to lodge an annual tax return and pay tax. Profits are taxed at a flat rate, as opposed to marginal rates
  • Increased regulation that needs to be complied with. Directors can face serious penalties for breaching regulations

Trusts

Trusts are widely used for investment and business purposes in Australia. With this structure, the business is operated by a Trustee (which can either be a company or one or more individuals). The Trustee is responsible for managing the Trust’s tax affairs as well as operating the business on behalf of the beneficiaries.

A Trust is required to have its own Tax File Number and lodge its own tax return on an annual basis. Similar to a partnership – the trust does not physically pay any tax. The Trustee will determine the appropriate distribution of profit to the beneficiaries. The beneficiaries include this income in their personal tax return and pay tax at their individual marginal rates.

There is quite an extensive list on types of Trusts, however the two most commonly used are Discretionary and Fixed. Beneficiaries of a fixed trust are entitled to a fixed percentage of the income generated – based on their proportional ownership of the trust. On the other hand, discretionary trusts have no fixed entitlement. It is up to the discretion of the Trustee to pay out different distributions to the beneficiaries each financial year.

A formal Trust Deed is required. The Deed explicitly sets out the powers of the trustee and formalises the operational procedures of the Trust.

Key Features of the Trust Business Structure:

  • A Trustee holds and manages the business assets on behalf of the Beneficiaries. The Trustee can be a company, or more than one individual
  • Corporate (company) Trustees provide a greater level of asset protection in comparison to Individual Trustees
  • Fixed Trusts must pay the same proportion of income to its beneficiaries each financial year (which is based on their ownership)
  • Discretionary Trusts have more flexibility in terms of paying income to beneficiaries
  • Trusts must lodge an annual tax return
  • Beneficiaries must include their share of income from the Trust in their personal tax return and pay tax at their marginal rate

What are the key differences between business structures

  Sole Trader Partnership Company Trust
Cost Low Medium Medium to high High
         
Complexity of setting up Simple Moderate Complex Highly complex
Tax obligations Low Low Medium High
Legal obligations Low Low to medium High Medium
Owner You You and your partners Company shareholders Trustee
Responsibility for business decisions You You and your partners share The director(s) Trustee
Responsibility for debts or losses You You and your partners share Generally, the company Trustee
Separate bank account needed No Yes Yes Yes
Extra administration and reporting No Yes Yes Yes

How can we help?

If you have any questions or would like further information about small business bookkeeping, please feel free to give our office on 08 9221 5522 or via email – info@camdenprofessionals.com.au , or arrange a time for a meeting so we can discuss your requirements in more detail.


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Before making an investment decision based on this advice you should consider, with or without the assistance of a securities adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances. In addition, the examples provided on this page and on this website are for illustrative purposes only.

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