Individuals thinking of starting up their own business can easily get confused with the different structures a business can operate under. Registering a business name is not the same as setting up a business structure. An understanding of the different business structures and the pros and cons of each classification will help you decide which structure best suit your current situation.
Types of business structures
There are four different types of business structures that operate in Australia. These are:
- Sole trader
Each of these business structures can have an impact on:
- The types of licenses and registrations you will need
- How much tax you need to pay
- The control you have over your business
- Your personal liability
- The regulations you need to meet
- Setup and ongoing maintenance costs
As personal situations change and businesses evolve, you can change your business structure if your circumstances change. You should always speak to your tax advisor to confirm the best business structure for you.
The sole trader structure is the most simple business structure. It involves a single individual running the business. The business can be in their own name or under a registered business name. The individual is solely responsible for managing the business, owns all the assets, and is legally liable for the debts incurred by the business.
The sole trader structure is common among many self-employed individuals such as freelancers and small services providers that do not have a high turnover. A sole trader is also permitted to employ staff.
This structure is generally not suited to businesses that have a high profit, or have high debt levels due to the nature of the business. An alternative structure may be more suitable as your business grows and you’ve acquired more assets, employ more people or added loans to the business.
- Simple to set up and costs are minimal
- Full ownership of the business
- All the profits belong to the sole trader
- There is flexibility. The sole trader makes all the decisions and does not have to deal with anyone else.
• Easy to close the business
- You only need to lodge a personal tax return each year
- Sole traders are a one-person operation, and this can become overwhelming for the individual
- It can be difficult to scale
- The owner is fully responsible for all business liabilities. Your personal assets can be called upon to settle the debt
- It can be harder to sell the business
- The business stops when the sole trader passes away
A partnership structure refers to two or more people running a business together. The partnership structure can operate under the partner’s names or a registered business name. Some partnerships have a partnership agreement in place, but this is optional. It is a good idea to have an agreement set up to outline how income and loss are distributed between the partners, and how the business is managed. This helps to prevent any miscommunications in the future.
- Inexpensive to set up
- There is access to more capital
- Partners benefit from each other’s experience, and both share the burden and responsibilities
- There is someone looking after the business when one partner takes a break
- It can be easier to close the business
- You will need to see a lawyer to draw up a partnership agreement
- Disputes can arise between partners due to personal differences
- Both partners are responsible for business debts and liabilities
- It can be difficult when one partner wants to leave the partnership
A trust is a separate entity that is managed by a trustee. The trustee controls assets and businesses that are held in the trust. Income generated by the trust is distributed to the nominated beneficiaries.
- There is greater asset protection than sole trader and partnership structures
- Income can be distributed to minimize tax among the beneficiaries
- It is more expensive to set up and maintain than a sole trader or partnership
- The trustee may be liable for debts incurred by the trust
- Any income that is not distributed to the beneficiaries will be taxed based on the trustee’s highest income tax rate
A company considered a separate entity by the ATO. A company is required to be registered with ASIC. A company is managed by company directors and owned by shareholders.
- Companies pay their own tax
- Shareholders are not responsible for the company’s debts
- There is greater asset protection
- More costly to set up and maintain than other structures
- There are more regulations to comply with
- You don’t have full control of the company unless you are the only director
Choosing a business structure
When choosing a business structure, your decision will depend on factors such as:
- The nature of your business
- Whether there are other business partners
- How profits and losses are to be shared
- Who is legally responsible
- Tax implications
- The growth potential of your business
- Your exit strategy
As a sole trader, you will need to lodge your business income on your personal tax return. With partnerships, the business will need to lodge a partnership tax return and show each partner’s income proportion. The tax payable is based on the partner’s share of the income.
Trusts do not have to pay tax when all of the income is distributed to its beneficiaries. Instead, the beneficiaries will pay tax based on their share of the income that’s distributed to them.
For companies, a company tax return needs to be lodged every year. Companies pay their own taxes at a flat rate of 30%, and there is no tax-free threshold available. For businesses with high-profit levels, this can be an advantage.
If you are looking at starting a business and need advice on what business structure is best suited to your needs, contact Moiler today for a confidential discussion.
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This document has been prepared by Manoeuvre Wealth, an Authorised Representative of Count Financial Limited ABN 19 001 974 625; AFSL 227232 (“Count”) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124 and is for general information only. The presentation has been prepared without taking into account your personal objectives, financial situation or needs. You should assess whether the information is appropriate for your needs and consider talking to a Count Authorised Representative before making any investment decision. The relevant PDS should be considered before making a decision about any financial product. The information is provided as an information service only and does not constitute financial product advice and should not be relied upon as financial product advice. 18 November 2019.