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
Determining the structure 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.
In Australia, there are four common types of business structures, including the following:
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
There are dedicated partnership laws for each state and territory in Australia. Contact us to learn more about the partnership laws in your territory/state.
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 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 a professional business advisor, accountant, or lawyer to decide about the most suitable structure.