When starting a business in Australia, you will need to choose an appropriate business structure. This decision will affect how your business is taxed, your liability level, and the legal obligations you need to meet for compliance purposes. 

The most common business structures in Australia are sole traders, partnerships, companies, and trusts. The different business structures each have their own advantages and disadvantages, so it’s vital to select the one that best suits your needs. 

For example, sole traders have complete control over their business but are personally liable for all debts and losses. In contrast, companies are separate legal entities from their owners, which limits liability but also comes with greater compliance obligations. 

Ultimately, the best structure will depend on your business goals. 

So, let’s take a closer look at each one. 

1. Sole Trader

A sole trader is Australia’s simplest and most common type of small business structure. If you’re a sole trader, you’re your business’s sole owner and operator.

It’s a relatively straightforward structure that can be easy to set up and run with minimal paperwork and costs. As a sole trader, you’re taxed as an individual and report your business income on your individual tax return.

The Australian Tax Office (ATO) also allows sole traders to claim a 50% discount on capital gains tax if they dispose of assets after one year.

The main downside of a sole trader structure is that you incur personal liability for all business debts and obligations. If your business fails, creditors can take over your personal assets, such as your home or car.

It’s worth mentioning that you can start your business as a sole trader and change structures as your business grows; once established, you’re not locked into this particular structure.

Like other structures, when conducting business as a sole trader, you must register for an Australian Business Number (ABN) and GST if your annual income exceeds the threshold.

2. Partnership Business Structure

A sole trader partnership business structure is similar to that of a sole trader in that the partners are legally responsible for all aspects of the business. However, here, two or more owners enter into a partnership agreement and share equally in the business’s profits and losses.

Partnerships are also relatively easy and inexpensive to set up and have fewer compliance requirements than companies. However, each partner is jointly liable for all debts and liabilities incurred by the partnership.

In terms of their tax obligations, partners pay tax on the share of the net partnership at their respective individual tax rates. Income must, however, also be reported on a partnership tax return.

3. Company: a Separate Legal Entity

A company structure is more complex than other business structures, such as sole traders or partnerships, because it’s a separate legal entity from its owners. The Australian Securities and Investments Commission (ASIC) plays a big role in regulating businesses and ensuring compliance. In other words, the company can enter into contracts, own business assets, and be sued in its own right.

Companies have different tax compliance obligations than other types of businesses and pay corporate tax at a flat rate on their profits. They are required to submit an annual company tax return (separate from that of the shareholders) and have their financial statements audited by a registered auditor every year.

Unfortunately, companies don’t have access to the same 50% capital gains tax concession that sole traders and partners do.

One advantage of setting up a company structure is that the shareholders’ liability is limited to their investment in the company; they are not personally liable for the business’s debts and liabilities. So, it’s usually the preferred structure for high-risk business operations that needs a solid asset protection strategy in place.

4. Trust 

Unlike a company, a trust business structure isn’t a separate legal entity. Instead, it’s a legal arrangement where assets are held by one party (the trustee) for the benefit of another party (the beneficiary). 

Australia has several types of trusts, including fixed, discretionary, unit, and hybrid trusts. Key differences between these trusts include their complexity, cost, legal obligations, and liability.

Discretionary trusts are often the preferred type in a business structure because of their flexibility. Essentially, a discretionary trust gives trustees complete discretion over distributing business profits— a popular (legal) tax minimisation strategy. Beneficiaries then pay tax on their distribution share at their income tax rates.

Another popular benefit of a trust structure for your business is that it provides asset protection for the beneficiaries. This means that if the trustees are sued, the assets of the trust will not be at risk.

Because the trustee essentially operates the venture on behalf of the beneficiaries, we recommend appointing a corporate trustee because its shareholders will benefit from a company’s limited liability.

Unfortunately, one key downside of a trust is that it must distribute all of its income to its beneficiaries. This means that if you have a business that is growing rapidly and reinvesting its profits back into the business, a trust is not the best option. This is because any profits left in the business would be subject to tax at the highest marginal tax rate of 45%.

So, if you require profits left in the business to help it scale, there are more suitable options than a trust. Instead, you may be better off using another structure like a company.

Making the Right Business Structure Choice

Various factors must be considered when making this decision, including your risk profile, the type of business you’re operating, your goals, and your finances.

Each business structure has its own advantages and disadvantages, so weighing up the pros and cons in light of your specific circumstances is important. Additionally, different structures can impact how much tax you are obligated to pay, emphasising the legal implications related to taxation.

For example, a sole proprietorship may not be the best choice for operating a high-risk business, as it doesn’t offer limited liability protection through a separate legal entity. If you want to keep your assets separate from your business affairs, a company or trust may be a better option.

Ultimately, there is no one-size-fits-all answer when choosing a business structure. The right choice for you will depend on your individual circumstances and objectives.

Key Takeaways 

• Australia has four main types of business structures: sole traders, partnerships, companies, and trusts. Each has its own pros and cons.
• Sole traders have complete control and a simple setup but are personally liable for all debts and losses.
• Partnerships share profits and losses among partners, but all partners have unlimited liability and varying legal obligations.
• Companies limit owners’ liability but have complex setup and compliance requirements.
• Trusts can provide asset protection but must distribute all income to beneficiaries.
• The best structure depends on your business goals, risk tolerance, tax strategy, and need for limited liability.
• If you’re unsure what type of business structure is right for your business, talking to a business accountant is a good place to start.

The best structure depends on your business goals, risk tolerance, tax strategy, and need for limited liability. 

If you’re unsure what type of business structure is right for your business, talking to a business accountant is a good place to start.

FAQs

What’s the Difference Between Pty Ltd and Ltd?

The key difference between Pty Ltd and Ltd is that Pty Ltd is a proprietary limited company, while an Ltd business structure refers to a public limited company. Pty Ltd companies have a maximum of 50 non-employee shareholders, while public companies can have an unlimited number of shareholders and are listed on the stock exchange. Both limit owners’ liability.

What are the Classification of Businesses in Australia?

The main business structures in Australia are sole traders, partnerships, companies, and trusts. Sole traders report business income on their personal tax returns, while partnerships distribute profits among partners. Companies limit liability for owners and have complex compliance obligations. Trusts provide some asset protection but must distribute all profits.

Can a Pty Ltd Be a Small Business?

Yes, a Pty Ltd can be a small business. Many small and medium enterprises choose to incorporate as Pty Ltd companies to benefit from the liability protection this structure provides. As long as the Pty Ltd meets criteria like annual turnover under $10 million, it would be classed as a small business in Australia.

Is Pty Ltd a Company or Sole Trader?

A Pty Ltd is a proprietary limited company, a type of Australian private company. It is a separate legal entity from its shareholders and directors. This differs from a sole trader, where the individual and the business are one legal entity. Sole traders have unlimited liability, whereas Pty Ltd shareholders’ liability is limited to their investment in shares.