What are the different types of business structures in Australia?<\/h2>\n
The types of business structures in Australia are:<\/p>\n
- \n
- sole trader business structure<\/li>\n
- partnership business structure<\/li>\n
- company business structure<\/li>\n
- trust business structure<\/li>\n<\/ul>\n
Choosing the right business structure is one of most important decisions to make as a new small business owner.<\/p>\n
This business structure guide will highlight the advantages and disadvantages of each business type to help you decide which one is most suitable for your specific needs.<\/p>\n
![\"\"](\"https:\/\/www.reckon.com\/au\/wp-content\/uploads\/2024\/07\/business-structures.png\")
<\/p>\n1) Sole trader business structure<\/h3>\n
A sole trader business structure is the simplest type of business, formed when one individual owns the business for which they\u2019re legally responsible.<\/p>\n
A sole trader will usually make all the decisions about running the business and are able to employ people to help run their business.<\/p>\n
Tax liability:<\/b>\u00a0You pay tax as an individual on any income you earn from a sole trader business.<\/p>\n
You\u2019re also required to pay GST<\/a> and submit a\u00a0business activity statement<\/a>\u00a0if your turnover is more than $75,000 a year.<\/p>\n
Advantages of a sole trader business structure:<\/h4>\n
- \n
- Easy to set up and maintain.<\/li>\n
- You have complete control over the business.<\/li>\n
- You retain all the profit.<\/li>\n
- You can change business structure easily.<\/li>\n<\/ul>\n
Disadvantages:<\/h4>\n
- \n
- You\u2019re personally liable for any debt the business incurs which means your personal assets (car\/house etc) are also at risk.<\/li>\n
- If your business makes decent money you\u2019ll start to pay tax at the highest marginal individual income bracket quite quickly.<\/li>\n
- Can be hard to take time off.<\/li>\n
- Can be harder to obtain finance.<\/li>\n
- You\u2019re responsible for paying yourself superannuation, workers compensation and other employee entitlements.<\/li>\n<\/ul>\n
2) Partnership business structure<\/h3>\n
Partnership business structures are formed when two or more individuals become co-owners of a business.<\/p>\n
A partnership business allows individuals to pool their assets and skills to increase their chances of success. A partnership is also able to hire employees to help them run the business.<\/p>\n
Tax liability:<\/b>\u00a0Partners pay tax as an individual with income from the business divided between partners. You\u2019re also required to pay GST<\/a> and submit a\u00a0business activity statement<\/a>\u00a0if your turnover is more than $75,000 a year.<\/p>\n
Advantages of a partnership business structure:<\/h4>\n
- \n
- Easy to set-up and maintain, with the addition of a partnership agreement.<\/li>\n
- Additional owners bring new capital investment and skills to the business.<\/li>\n
- Can change business structure easily.<\/li>\n<\/ul>\n
Disadvantages:<\/h4>\n
- \n
- Partnership agreement required to set out the rights and obligations of each of the partners \u2013\u00a0which can be expensive.<\/li>\n
- You must share control of the business.<\/li>\n
- You and your partners are personally liable for any debts the partnership incurs which means your personal assets (car\/house etc) are also at risk.<\/li>\n
- If your business makes decent money each partner will start to pay tax at the highest marginal individual income bracket quite quickly.<\/li>\n
- There can be disagreements among partners which can cause disruption to the business.<\/li>\n<\/ul>\n
3) Company business structure<\/h3>\n
A company business structure is formed when an owner registers their business with\u00a0the Australian Securities and Investments Commission (ASIC<\/a>).<\/p>\n
The business then becomes a separate legal entity from the original business owner.<\/p>\n
This means the company itself can own assets and enter into contracts directly with third parties.<\/p>\n
Tax liability:<\/b>\u00a0Companies are subject to company tax rates<\/a> which are different than an individual tax rates. The current company tax rate is either 27.5% or 30% depending on the\u00a0criteria you meet<\/a>. You\u2019re also required to pay GST<\/a> if your turnover is more than $75,000 a year.<\/p>\n
Advantages of a company business structure:<\/h4>\n
- \n
- Reduced personal responsibility for any business debts and liabilities and the company is a separate legal entity.<\/li>\n
- Company tax rates are much lower than the higher marginal tax rates and is therefore far more tax effective once your business earns over a certain amount.<\/li>\n
- Easier to raise finance.<\/li>\n<\/ul>\n
Disadvantages:<\/h4>\n
- \n
- Business operations are controlled by directors and owned by shareholders.<\/li>\n
- Higher set up costs associated with incorporating the new company.<\/li>\n
- More paperwork, reporting and ongoing compliance requirements and costs.<\/li>\n
- You must understand and comply with all obligations under the\u00a0Corporations Act 2001.<\/li>\n
- An annual company tax return to be lodged with the ATO.<\/li>\n<\/ul>\n
4) Trust business structure<\/h3>\n
A trust business structure, in its basic form, is a type of business which legally holds property or income for the benefit of others.<\/p>\n
The trustee can be either an individual or a company and is responsible for any debts and liabilities.<\/p>\n
Trusts are commonly used to manage, protect, and pass on family assets including shares, personal property, and the family\u2019s business from one generation to another.<\/p>\n
Running your business through a trust involves a trustee owning and operating the business\u2019s assets and distributing the business\u2019s income to the beneficiaries included in the trust deed.<\/p>\n
Tax liability:<\/b>\u00a0The trustee distributes the business profits to the beneficiaries who then pay tax on the income received under their marginal individual tax rates.<\/p>\n
Advantages of a trust business structure:<\/h4>\n
- \n
- Reduced personal responsibility for any business debts and liabilities if the trustee is a company.<\/li>\n
- Trusts typically don\u2019t pay tax, provided they distribute all the profits. This is because profits are distributed annually to beneficiaries who pay tax individually.<\/li>\n
- Flexibility in distributing profits to beneficiaries. This allows income to be distributed at the trustee\u2019s discretion to beneficiaries with the lowest marginal tax rates to minimise the total tax beneficiaries pay.<\/li>\n<\/ul>\n
Disadvantages:<\/h4>\n