One of the first and key decisions you will make when starting a business – is its structure. The type of structure will depend on the size of the business and how you want to run it. Each different structure will have an impact on specific areas such as tax, asset protection and set up costs.
The four most common types of business structures in Australia are:
- Sole Trader
- Company
- Partnership
- Trust
Sole Trader –
A sole trader is a simple form of business structure and is inexpensive and relatively easy to set up. As a sole trader you will be legally responsible for your day to day business decisions, as well as any debts or losses.
The key elements to consider when being a sole trader are:
- Simple to set up and operate
- Full control of your assets and day to day business decisions
- Fewer reporting requirements
- Allows you to use your individual tax file number (TFN) to lodge your tax returns
- You do not have to have a separate business account – though this is still recommended
- Keep financial records for 5 years
- All your personal assets are at risk if things go wrong
- Does not allow you to split business profits or losses with family members
- You are personally liable to pay tax on all income made
- You can employ people – you must comply with workers compensation and superannuation contributions
- Must register for GST is turnover is $75,000 or more
Partnership –
A partnership is made up of 2 or more people who distribute income or losses between them. Individual states and territories govern partnership laws.
Three main types of partnerships:
- General Partnership (GP) is where all partners have equal responsibilities for the management of the business, and both have unlimited liability for the debts and obligations it may incur.
- Limited Partnership (LP) is made up of partners whose liability is limited to the amount of money they have contributed. Limited partners are usually passive investors who don’t play any role in the day to day business.
- Incorporated Limited Partnership (ILP) is where partners can have limited liability for the debts of the business. However, there must be one partner with unlimited liability.
If you are thinking about setting up a partnership here are the key elements to consider:
- Relatively easy and inexpensive to set up
- Have minimal reporting requirements
- Require separate Tax File Numbers (TFN)
- Must apply and use an Australian Business Number (ABN)
- Share control of business and management
- Do not pay income tax on the income derived – each partner pays tax on the share of the net income the partnership makes
- Require a partnership tax return to be lodged with the ATO each year
- Each partner responsible for their own superannuation arrangements
- Must register for GST is turnover is $75,000 or more
Company –
A company business structure is separate legal entity, unlike a sole trader or partnership. This means the company has the same rights and a person who can incur debt, sue and be sued.
As a director of the company, your financial obligation is to pay the company any amount unpaid on your shares if you are called to do so. The director(s) of the company may be held personally liable if found to be in breach of their legal obligations under The Corporations Act 2001.
Companies are more expensive and harder to set up and most likely will suit people who are expecting their business income to be highly variable. They may also want the option to use losses to offset future profits.
The key features to consider are:
- A separate legal entity
- More complex structure to start and run
- Higher set up and running costs
- Business operations are controlled by directors and owned by the shareholders
- Members have limited liability
- The money the business earns belongs to the company
- Annual company tax return to be lodged to the ATO each year
- Complete an annual review and pay annual review fees
- Directors must complete a declaration of solvency each year
- Wider access to capital
- Must register for GST if your turnover is $75,000 or more
- Must update ASIC within 28 days of key changes to company details
- Keep financial records
Trust –
A trust is an obligation on a person (the trustee) to hold property of assets (e.g. business assets) for the benefit of others known as beneficiaries. If you operate your business as a trust, the trustee is legally responsible for its operations. A trustee of a trust can be a company, providing asset protection.
Key features if you are thinking of setting up a trust are:
- Can be expensive set up and operate
- Require a formal trust deed that outlines how the trust operates
- Require the trustee to undertake formal yearly administrative tasks
- Can distribute profit to lower income earners within the family.
- Can distribute to a bucket Company.