This blog is intended to give you an overview of their unique characteristics as selecting one over the others will have impacts on your tax, personal liability, costs and paperwork required as well as your role as a business owner. Happy learning!
The most common business structures in Australia are: Sole Traders, Partnerships, Companies, and Trusts.
It might be worthwhile noting that whilst this is an important decision, rest-assured that as your business inevitably grow and its needs change, you are free to change its business structure whenever you wish and we recommend that you consult with a professional accountant or financial advisor prior to making any decision.
Registering as a Sole Trader is by far the simplest.
This structure is cheap to operate and requires the least amount of paperwork whilst providing you with the flexibility to easily change the legal structure when your business evolves. As a Sole Trader you retain complete control over your business because Sole Traders are legally perceived as the same entity as their owners. This means that you will be taxed through your personal Tax File Number, at your personal tax rate, and that your assets are the business’ assets. So, whilst you are in full control, you also assume full responsibility and unlimited liability for any loans or other risky decisions that is made.
This structure is perfect for individuals wanting to start a business to provide services or goods that do not require a big management team or overhead costs; Think artists that want to begin accepting commissions for their work or a plumber that wants to begin offering his services as a one-man team.
Partnerships are also relatively simple to setup and cheap the operate, but differ from Sole Traders in that it will have its own Tax File Number and all partners of the business are responsible and liable for the decisions of the business.
The income and responsibility will be divided amongst the partners and each will be taxed at their individual tax rate according to their share of the partnership. Legally, this means that a partnership is recognized as the same entity as the group of partners who would be liable for any debt or obligations the business incurs. Whilst this is still a very flexible structure with simple reporting requirements like a Sole Trader, it enables you to team up with friends or family to start a business together and share in its successes (as well as losses).
What will be very useful for this structure is a partnership agreement stipulating the exact roles and ownership of each partner to avoid any major headaches later! Partnerships are ideal for starting a business that might need a little more capital and a team to start with; like opening an art agency with a group of artists or a plumbing service with a team of plumbers!
Companies are more complex to setup and costly to run, however, it affords you many benefits as a businesses owner that does not exist with Sole Traders or Partnerships.
Firstly, a company is recognized as its own legal entity that is taxed at the corporate rate, separate from its managers and shareholders. This means that as a business owner or shareholder you are not liable for all of the company’s obligations like debt or losses. This allows you to do things like taking out loans from a bank without putting your personal assets on the line like you would as a Sole Trader or in a Partnership.
However, having all these freedoms also mean much more paperwork! To set up a company you must understand and comply with the Corporations Act, lodging a separate tax return with the ATO every year and conduct annual reviews amongst many other things. Companies are generally what Sole Traders and Partnerships become when the business grows and its needs for capital increases. Continuing with our previous examples, imagine that the art agency or plumbing service grows, It will likely spend more money to do things like hiring new staff or purchasing new equipment.
Becoming a company will make it easier to borrow money from banks, attract new investors from selling shares as well as transact with suppliers because it is seen as a stable and mature business structure. Not everyone can afford to start a company as you would probably need the help of experts.
Trusts are highly complex structures that can be very costly to set up but affords the ability to have certain tax advantages and less reporting requirements than a company.
How a trust works begins with the trust deed, which is a formal document created to specify the responsibility of the trustee and the rights of the beneficiaries. The trustee’s role is to look after and manage the trust so that its income can be distributed to its beneficiaries. The trust deed can stipulate exactly how this distribution occurs which provides a great degree of flexibility in how the trust’s income is taxed. For example, depending on the deed, the trust may not be taxed at all until its income is actually distributed, at which point the beneficiaries will be taxed at their respective personal tax rates which may be lower than the corporate tax rate, allowing tax savings on that income.
As great as these benefits sound, running a trust requires a lot of work. Like a company, you should consult accountants and financial advisors to set one up to meet your specific needs. For example, if you want your business structure to benefit different members of your family, who have different individual tax rates, then a trust will provide you with the flexibility to maximise tax savings on the income you distribute.