When starting a business, it’s important to use the correct business structure as it affects your tax liabilities, costs and your personal asset protection. There are many advantages and disadvantages business structures and there is no one structure fits all. It’s essential to weigh up all your options. To get you started, here are the four most common business structures;
As a Sole Trader you are the sole owner of the business. You may employ others – but the organisation cannot employ you. You are responsible for paying staff wages, superannuation and Goods and Services Tax (GST) if your earnings are over $75,000 per year. All income will be lodged in your personal tax return. While a Sole Trader structure is the easiest and most simple structure to execute, the Sole Trader is personally liable for all debts incurred in the business, but also benefits from all the profits.
A partnership is appropriate for two or more people going into business together. This structure allows the distribution of profits and losses amongst all partners in an agreed allocation. Like a Sole Trader, all partners are personally liable for all debts created and is taxed with your personal tax return (or if a partner is an entity, at the corporate tax rate). A unique Australian Business Number (ABN) and Tax File Number (TFN) is required for this structure. Ownership, responsibilities and management is spread amongst all partners.
A company is a legal entity in its own right and conducts business to profit shareholders via “Directors”. Companies are a far more complex method then the two previously mentioned however have some desirable advantages. Assets and Debts are held by the company; shareholders are not personally liable for any debt incurred in this structure. Directors on the other hand, may be personally liable if not working in the best interest of shareholders.
Companies pay a fixed company rate (with no tax-free threshold). Companies are regulated by ASIC which add several complexities and rules which need to be adhered to in this structure. Ownership can be easily transferred or sold.
A trust is business carried out by the trustee on behalf of the beneficiaries. Common amongst families, it allows the income and assets of the trust to be distributed to the beneficiaries based on discretion (Discretionary Trust) or in units (Unit Trust – similar to shares). A trustee may be an individual or company and is legally liable for the debts of the trust. Similar to a Sole Trader and Partnership, Trusts are not a separate legal entity.