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Types of Business Structures in Australia

Specialist accountants for tradies

How to Pick the Right Business Structure?

Thininking about starting a new business?  Choosing the right business structure in Australia is paramount.

Without understanding the differences between a company, trust, sole trader, and partnership, you cannot decide which business structure will be right. Here’s all you need to know about business structures, and how to make the right decision about your business.

Common Types of Business Structures in Australia

Determining different business structures in Australia is among the most crucial decisions you’ll need to make when starting or expanding your business. The choice of a structure depends on the type and size of the business and how you intend to operate it. 

It is worth noting that every structure has some degree of impact on specific areas, such as the tax you’ll pay, set up costs, and asset protection, etc.

There are four common types of business structures in Australia.

Sole trader

A sole trader is the simplest form of business structure and is relatively easy and inexpensive to set up.

As per Australian law, a sole trader will be fully responsible for all the aspects of business, such as day-to-day business operations and decisions, debts, and losses, and profits.

If you want to start your business as a sole trader, do consider the following elements:

  • It will give you full control on business decisions and operations
  • It is very easy to set up and operate
  • It is a relatively cost-effective structure
  • Fewer reporting requirements are involved
  • You can lodge tax returns using your TFN (tax file number)
  • You wouldn’t need a dedicated business bank account (however, we recommend you have one to monitor business expenses and income conveniently
  • You can keep financial data for at least five years
  • This structure involves unlimited liability, so, if things go wrong all of your assets will be at risk
  • You cannot split profits or losses with family members
  • You’ll be the only person liable to pay tax on the whole income you receive

Hiring Employees as a Sole Trader:

As a sole trader, you can hire people to help you operate the business. However, there are certain obligations and rules you need to adhere to, such as workers’ superannuation contributions and compensation insurance.

Company

Since it is a separate legal entity, a company is a more complex structure that considerably limits your liability.

Separate legal entity means that the company will have similar rights as an individual would, and may incur debt, sue, or be sued. You’ll serve as a member, and won’t be liable for the company’s debts, while your only financial obligation will be to pay the unpaid amount on your shares if you are required to do so. However, company directors will be held responsible if legal requirements are not fulfilled.

A company is a complex and costly structure to set up. Generally, it is suitable for people expecting to receive variable income from their business and use losses to balance future profits.

Company directors and officers need to comply with their legal responsibilities under the Corporations Act 2001.

So if you want to start your business as a company, consider these elements.

A company is a separate entity.  So it’s important to understand the implications.

  • It is a complex structure to run your business
  • Its set up, and running costs are higher than other structures
  • Important to understand and adhere to all the obligations under the Corporations Act 2001
  • Business operations will be jointly owned and controlled by shareholders and directors
  • Company members will have restricted liability
  • The money your business earns will belong to the company
  • You’ll need to lodge an annual company tax return with the ATO
  • Yearly company review fees are payable to ASIC
  • Company allows you to have extensive access to capital

If your company’s turnover is around $75,000 or higher, you must register it for goods and services tax (GST). For more information on the GST and your tax obligations, talk to us or check out the official ATO (Australian Tax Office) website.

Reporting and Legal Obligations for Companies:

Companies and their directors have to comply with some reporting and legal obligations, which include:

  • They must update the ASIC within 28 days regarding any changes to company detail
  • Maintain financial records
  • Comply with the responsibilities as a company director

Partnership

Two or more individuals agree to run the business together and distribute income, profits, and losses.

If you want to set up your business under a partnership structure, here are some elements you need to consider:

  • Partnership structure is inexpensive
  • It is relatively easy to set up
  • It involves minimal reporting requirements
  • Partners will have separate TFNs (Tax File Numbers)
  • The business will require an ABN (Australian Business Number) and use it for all kinds of business dealings
  • Partners equally share control and business operations
  • The business will not be subject to tax on the income earned as each of the partners will pay tax on the share of their net partnership income
  • Partners will need to lodge a tax return with the ATO (Australian Taxation Office) each year
  • Each partner will be responsible for their superannuation arrangements
  • If the turnover reaches or exceeds $75,000 the business must register for GST

Contact us to learn more about the partnership structure and implications.

Trust

A trustee is responsible for managing business operations of a trust.

A trust is a responsibility imposed on an individual, referred to as a trustee, to manage property or assets on behalf of others, called beneficiaries. The trustee will be obligated to hold assets and properties for the benefit of beneficiaries. A trust can be a company offering asset protection.

If you want to start your business with a trust structure, do consider the following elements:

  • It is an expensive structure to set up and operate
  • You’ll need a formal trust deed outlining how the trust will operate
  • The trustee must undertake all the legal annual administrative tasks

If your business functions as a trust, remember that its trustee will be responsible for all of its operations as per the law.

Choosing a Business Structure

When it is time to select your business structure, the best strategy would be to pick the one that perfectly meets your needs. In this regard, you must consider every option and understand the laws and rules governing each structure.

What does Your Business Structure determine?

It can determine the following aspects related to your business:

  • The licenses you get
  • The tax you pay
  • Whether you’ll be the owner or employee in your business
  • Your liabilities
  • The power and control you’ll have over the business
  • Paperwork size and ongoing costs for your business

Points to Remember:

You can change your business’s structure whenever you want until the business is active and operational. As your business expands, you might need to switch to a different type of structure to meet its growing needs. However, just like determining the business structure is a tricky task, switching from one structure to another is equally challenging. Talk to us to see which business structure is the most suitable for your business.

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