Whether you’re just starting a business, or you have been in business for a long time, having the right business structure is an important step to running any business — especially for tax and exposure to personal liability, but also for growth and planning purposes. With so many options available, it can be hard to know which setup is right for you.
Let’s bring some clarity and simplicity to a rather detailed topic, so you can make a clear, confident decision that’s best for your business.
What is a business structure?
There a four types of business structures; Sole Trader, Partnership, Trust and Company. There is no one-size-fits-all business structure, each is suited to different situations and has its benefits and potential draw backs. The most important thing to understand is why you’re choosing any given structure for your business; what the benefits are, what the tax implications will be, if it will cost more to manage, if it suits your current situation and what your growth goals are.
Sole Trader business structure
A Sole Trader is a business with a single owner. They are legally responsible for all aspects of running the business including any debts and losses.
- Simple and cheap to set up
- Easy to operate
- Simpler tax — less reporting
- Full ownership and control of your business
- There’s unlimited liability and all your personal assets could be at risk
- There is tax planning limitations as business losses can’t be distributed to others.
- There is no continuity. If the sole trader stops running the business or passes away, the business ceases and isn’t passed on.
- You are personally liable to pay tax on all income derived
- Must Register for GST over $75K
You can hire employees
You don’t have to pay yourself super, however it is should be considered as part of your retirement planning.
Is a sole trader structure a good option for you?
Being sole trader is a great place to start, whether you have a side hustle, or run a full time business, being a sole trader can be simple and easy. If your business starts to grow and your income reaches a higher tax bracket it can be a good idea to change to a company or another structure to suit your growth.
Partnership business structure
A partnership is made up of two or more people/entities. The partnership must have its own ABN and Income and losses are distributed between each partner. There are 3 main types of partnerships; General Partnership, Limited Partnership and Incorporated Limited Partnership. The most common is the General/Family Partnerships.
General / Family Partnership
All partners are equally responsible for management with unlimited liability for losses etc.
- Relatively easy and low costs for setup
- Minimal reporting requirements
- Decisions can’t be made on your own, they should be discussed with the partners
- You are not separate from the business as the partnership is not a separate entity
- There’s unlimited liability on all partners’ assets
- Require a separate TFN for the partnership
- Income tax is not payed on the income earned but rather each partner pays tax on their share on the net partnership income.
- Must register for GST over $75K
- Each State and Territory in Australia have their own Partnership laws and legal requirements so it is important to know what is required from you depending on your locations. For more info check out business.gov on partnerships here
You can employ people under a partnership business structure
- Each partner may contribute to their own super
- Superannuation Guarantee must be paid to employees
Company business structure
A company has limited liability. Unlike a sole trader or partnership, a company is its own entity separate to the owner, meaning the company can incur debt, sue and be sued. The owners are considered members or shareholders, of which there must be at least one associated with the business, and are managed by directors. Directors have legal reporting responsibilities to ensure they are following compliance including keeping ASIC up to date with any changes as they arise, keep all financial records and comply with obligations as a director.
- There is limited liability which means there is a level of protection for shareholders and owners/directors that prevents them (in most circumstances) being held personally responsible for financial loss or damages.
- Tax planning opportunities.
- Setup cost for registering the business is higher
- Annual company renewal fees; currently $290
- Comprehensive paperwork as there are more compliance requirements
- Require a separate TFN for the company
- Money the business earns belongs to the company. Owners and directors get paid a wage or a dividend
- The base company tax rate is 25% regardless of profit (unless you are turning over +50 million)
- Annual Tax Return has to be submitted for the company, separate to a personal/business owners tax return
- Must Register for GST over $75K
- All directors/owners must have a Director ID: How to apply for a Director ID
A company is a great structure for employing people.
Companies must pay super for all employees including for company owners and directors and in some circumstances must be paid on subcontractors.
Trust business structure
A trust is a structure that holds a business for the benefit of the beneficiaries. They are generally used to protect the business or assets. The trustee decides how business profits should be distributed to beneficiaries. The trustee can be a person or a business. A trust requires a formal trust deed and a licensed professional to help you is recommended.
- Limited liability is possible if corporate trustee is in place
- More privacy than a company
- Flexibility in distributing benefits to beneficiaries
- More complex and expensive to set-up
- The trustee must take on annual administration tasks
- Can be difficult to dissolve or make changes once setup
- Must register for GST over $75K
- Requires a separate TFN for the trust
- Beneficiaries pay tax on any income they receive from the trust at their marginal tax rate
- A trust can be effective because it is flexible in the way it makes distributions. It only distributes profits, not losses.
You can employ people under a trust business structure
- A trust is required to pay employees super
Which business structure is right for me?
There are lots of questions to ask when you are setting up a business and choosing which structure is right for you. Costs of each structure needs to be considered along with taxation implications, asset protection and future business goals when determining which structure is best for you.
It’s our recommendation you talk to a professional business advisor when making this decision, to work smart, avoid liability headaches, and get the best out of your tax.
A good accountant will help you with the practical business structure setup too, so you will have one less thing to worry about.
Starting a business?
Want some more info on starting a small business? Check out our blog to help you get started: How to start a small business — Tips from an accountant