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A comprehensive comparison of the most suitable business structure for you!

There are four commonly used business structures in Australia:

  • Sole Trader
  • Partnership
  • Company
  • Trust

Clients will often earn income from different sources and own different types of investments which will require a complex business structure. This will ensure that their assets are protected, minimise their exposure to risks and implement effective tax planning.

At Box Advisory Services, we’ve developed an easy to understand table of comparisons to some of the key differences between each business structure. Whilst it’s important in choosing the right structure as your business changes and grows, know that you are not locked into any structure and you can change the structure as your situation evolves.

 

SOLE TRADERPARTNERSHIPCOMPANYTRUST
SETUP AND COSTSRegistration of Australian Business Number (ABN) – free

Registration of the business name – one year ($36) or three years ($84)

Separate business bank accounts (recommended but not compulsory) – bank fees may apply

Registration of Australia Business Number (ABN) – free

Registration of the business name – one year ($36) or three years ($84)

Requires a separate Tax File Number (TFN)

Separate business bank accounts are recommended – bank fees may apply

Registration of Australian Business Number (ABN) – free

Registration of the company – $900 (plus GST) for a proprietary limited company

Separate business bank accounts are compulsory – bank fees may apply

Can be imposed on a person or an entity (a trustee) to hold property or assets for the benefit of beneficiariesRegistration of Australia Business Number (ABN) and Tax File Number (TFN) – free

Formal trust deed must be setup – legal fees and stamp duty ($1000 plus GST) will apply

Registration of company – $900 (plus GST) if the trustee is a new company

A separate bank account is compulsory – bank fees may apply

Setup costs range dependent on circumstances

TAXATIONTaxed as individualBusiness income is reported in your individual tax return

Tax-free threshold is $18,200 in 2018/19

Taxes owing are subject to income levels and claimable deductions

The highest marginal rate is at 47% (inclusive of Medicare levy)

Must be registered for GST if annual GST turnover is $75,000 or more

Entitled to a 50% discount on capital gains if the assets are disposed of after one year

The partnership is not a separate legal entity

Partners pay tax on the share of the net partnership income you receive

Partnership income reported in a partnership tax return – each partner pays tax on their share of the partnership profit at the individual tax rate – may be eligible for the small business tax offset

A partnership must be registered for GST if annual GST turnover is $75,000 or more

Entitled to a 50% discount on capital gains if the assets are disposed of after one year

Taxed as a separate entityCompany income reported in a company tax return

No tax-free threshold for companies

The company tax rate is 27.5% for 2018/19

As a director, you must report any income earned from the company or other sources in the income tax return. This may also include a lodgement of fringe benefits tax (FBT) if you receive any.

Must be registered for GST if annual GST turnover is $75,000 or more

Not entitled to a 50% discount on capital gains if assets are disposed of after one year

In NSW, you can access the land tax threshold for companies if the company owns the land.

Taxed as a separate entity

A trust tax return must be reported separately

Trust does not incur income tax if all of the trust income is distributed to adult resident beneficiaries

Must be registered for GST if annual GST turnover is $75,000 or more

Entitled to a 50% discount on capital gains if the assets are disposed of after one year

Trust can carry over a loss into the new financial year to reduce the trust’s net income in a later year

In NSW, generally, there is no land tax threshold for Family Trust.

ONGOING COST AND ADMINISTRATIONMinimal paperwork due to a simple business structure and low ongoing costs

No separate lodgement of the tax return from your personal tax return

Minimal paperwork due to a simple business structure and ongoing costsAs it is a more complex business structure, more paperwork is generally required. The company must lodge its own tax return in addition to individual tax returns.

Subject to annual review by the Australian Securities and Investments Commission (ASIC)

Annual review fee for a proprietary company – $246

As it is a more complex business structure, more paperwork is generally required.

No general ongoing costs except for any accounting fees in relation to tax returns

The trustee company (if available) will incur an ongoing cost from ASIC.

Changes to the trust deed can incur legal fees if required

INCOMEAll revenue earned is treated as individual incomeDeductions can be claimed for costs incurred in running the business

Funds can be withdrawn from the business bank account

Each employee is responsible for their own superannuation arrangementsIncome earned by the company belongs to the company entityAs a director, you may be paid wages or directors’ fee

Income can be distributed to shareholders dividends or loans

Trust income is generally used for tax minimisation purposes. Income must be distributed to beneficiaries every year

Losses in a trust are carried forward and are not distributed to beneficiaries

LIABILITY OF DEBTPersonally liable for all financial or tax debts as there is no division in liability between business and personal assets

Assets under your name may be used to pay business debts

Personally liable for all financial tax debts as there is no division in liability between business and personal assetCompany entity is generally liable for all business debts

As a director, you are personally liable for employer obligations such as superannuation and wages

Trustee is generally liable for all debts

Provides asset protection for the beneficiary

Director of trustee company is liable for employer obligations such as superannuation and wages

EMPLOYMENTAble to employ staff – workers’ compensation insurance required at the time of employing staffAble to employ staff – workers’ compensation insurance required at the time of employing staffAble to employ staff – workers’ compensation insurance required at the time of employing staffAble to employ staff – workers’ compensation insurance required at the time of employing staff
OTHERBusiness will cease upon the decease of sole traderPartnership may be dissolved. These include:
– Partnership terms expired
– One partner gives written notice to the other partner to exit the partnership
– One or both partners can no longer legally own a business
– Court order
– Death of one of the partners– Business has gone bankrupt or insolvent
Business may still run after the death of the director with the benefit of perpetual successionBusiness may still run after the death of the director of the trustee company or individual trustee. However, trust has a vesting date which is often 80 years or less

Box Advisory Services offers a complete range of business and taxation advice for small to medium-sized businesses in Australia. Book an appointment with us now!

Disclaimer: 
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note however, that the information is intended as a guide only, providing an overview of general information available to contractors and small businesses. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek your own advice for any legal or tax issues raised in your business affairs.