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. Each structure has its 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.
A sole trader is Australia’s simplest and most common type of small business structure. If you’re a sole trader, you’re the sole owner and operator of your business.
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 being a sole trader structure is that you incur personal liability for all business debts and obligations. If your business fails, creditors can come after your personal assets, such as your home or car.
It’s worth mentioning you can start your business as a sole trader and change structures as your business grows; you’re not locked into this particular structure once established.
Like other structures, you must register for an Australian Business Number (ABN) and GST if your annual income exceeds the threshold.
You might also be interested in our Ultimate Guide on GST.
2. Partnership
A partnership business structure is similar to a sole trader in that the partners are legally responsible for all aspects of the business. However, in a partnership, two or more owners share equally in the profits and losses of the business.
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 company business structure is more complex than other business structures, such as sole traders or partnerships, because it’s a separate legal entity from its owners. 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 compared to other types of businesses and pay corporate tax at a flat rate on their profits. A company must also have their financial statements audited by a registered company auditor every year.
Unfortunately, a company doesn’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 debts and liabilities. So, it’s usually the preferred structure for high-risk business operations that need a solid asset protection strategy in place.
You might also be interested in our guide on How to Start a Company in Australia for $500
4. Trust
Unlike a company, trust structures are not separate legal entities. Instead, it’s a legal arrangement where assets are held by one party (the trustee) for the benefit of another party (the beneficiary). There are several types of trusts in Australia, including fixed, discretionary, unit, and hybrid trusts.
Discretionary trusts are often the preferred type in a business structure because of their flexibility. Essentially, a discretionary trust gives trustees complete discretion over how to distribute business profits—which is a popular (legal) tax minimisation strategy. Beneficiaries then pay tax on their distribution share at their personal 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 you appoint a corporate trustee because its shareholders will also 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. The reason for this is that 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, a trust is not the most suitable option. Instead, you may be better off using another structure, such as a company.
Making the Right Business Structure Choice
There are various factors to consider when making this decision, including your risk profile, the type of business you’re operating, your goals, and what you can afford.
Each business structure has its own advantages and disadvantages, so weighing up the pros and cons in light of your specific circumstances is important.
For example, a sole proprietorship may not be the best choice if you’re operating a high-risk business, as it doesn’t offer limited liability protection through a separate legal entity. If you’re looking to keep your personal 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.
At Box Advisory Services, our team of experienced accountants can provide expert advice on the best way to structure your business. We can also assist with other aspects of starting a new business, such as business registrations for your ABN, Tax File Number (TFN) and GST.
Contact us today to learn more about how we can help you get your new business off to a successful start.
Key Takeaways
When starting a business, it’s crucial to form the right business & legal structure, as it will significantly impact your bottom line and the admin that goes into maintaining operations.
Engaging the help of a business accountant can be a big help in making sure you choose the right structure for your business. Business accountants are familiar with the different types of business structures and can help you understand the pros and cons of each one.
They can also help you understand the tax implications of each type of business structure and ensure that you make the most tax-efficient choice for your business.
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.
