The right business structure will factor into how much tax you pay, your personal liability, how your business grows and more. Choosing from the different business structures in Australia is one of the first decisions every small business owner has to make.
What is a sole trader structure?
A sole trader structure is the simplest business structure. You operate under your own name, make all business decisions and keep all business profits. Youโre also legally responsible for every aspect of the business and all its legal obligations.
You pay tax on all business income at your individual tax file number rates. If your turnover is higher than $75,000, you have to register for GST and submit a business activity statement regularly. A sole trader has unlimited liability โ in other words, your personal assets are at risk if the business fails or if you incur debt thatโs greater than what the business can pay.
A sole trader partnership isnโt possible โ if you want to share ownership, you need a partnership or company structure. That being said, a sole trader can employ staff and change business structure later as their business activities grow. The best news? This type of set-up has very few reporting requirements.
What is a partnership business structure?
This type of business structure is formed when two or more people run a business together. The partners pool resources and share business profits according to their partnership agreement.
Each partner pays tax on their share of net income at their own individual tax rates. In a general partnership, all partners are personally liable for business debts. A limited partnership provides some asset protection for silent partners.
A partnership agreement should cover profit-sharing, roles, dispute resolution, and exit terms. Without one, default state rules apply. Partners are personally liable for any and all debts incurred by other partners in the business, which means their personal assets are at risk.
What is a company business structure?
A company business structure is a separate legal entity registered with the Australian Securities and Investments Commission (ASIC). The company structure means company debts are separate from the personal assets of company directors and shareholders.
Companies pay income tax at the company tax rate (25% for base-rate entities, 30% for others) rather than at individual rates, which can be more favourable once business income grows. A registered company can also more easily raise capital from private investors.
The downside to this business set-up is higher startup costs, more complicated tax returns and stricter reporting. Company directors have other obligations under the Corporations Act, too. You have to lodge an annual company name renewal with ASIC and meet ongoing compliance requirements.
What is a trust business structure?
A trust business structure holds assets and business income for the benefit of named beneficiaries. A trustee manages the trust and has to follow the rules set out in the trust deed.
The trustee can distribute profits to beneficiaries at their discretion. Beneficiaries then pay tax on the trust’s net income at their own marginal rates. The trustee can distribute income so the beneficiaries’ profits are taxed at lower rates. If a beneficiary has a low tax rate, it can minimise the total tax the group pays. Undistributed income can be subject to penalty tax rates.
Trusts are common for family businesses and family members who want flexibility with income distribution. That being said, a trust is more expensive to set up and harder to dissolve.
Hot tip: The trust deed sets the legal structure and canโt be easily changed.
How do you choose the right business structure?
The right business structure really comes down to your own business goals or risk appetite. Before deciding, factor in things like personal liability, how you want to distribute income, setup costs and your plans to raise capital.
It might be helpful to use the business structure tool to compare your potential business structures. For professional advice, always consult an accountant or check out the ATOโs business structure guide.
Here is our quick cheatsheet for different business structures:
| ย | Sole Trader | Partnership | Company | Trust |
|---|---|---|---|---|
| Is the structure hard to set up? | No | No | Yes | Yes |
| Is it expensive to set-up? | No | No | Yes | Yes |
| Do I have complete control? | Yes | No | No | No |
| Are there complex reporting requirements? | No | No | Yes | Yes |
| Are my assets under threat if my business goes into debt? | Yes | Yes | No | No |
| Do I receive full profits made from the business? | Yes | No | No | No |
| Can I employ staff? | Yes | Yes | Yes | Yes |
| Can I change the legal structure easily? | Yes | Yes | No | No |
| Is it easy to raise capital? | No | Yes | Yes | Yes |
| Is it easy to dissolve or exit? | Yes | Yes | Yes | No |
Every structure also affects how you register a business name with ASIC and whether you need an individual tax file number or a company tax file number. Always get expert advice before choosing.
Top tip: Your legal structure impacts personal income tax, payroll tax, asset protection and how your business grows over each financial year. Making the right decision now will save you time and money later.
Choosing the right business structure isnโt permanent. As your business grows, you can change from a sole trader to a partnership, company, or trust. But changing structures comes with costs and tax changes, so make the right choice early.
