You’ve probably heard a lot of conflicting advice about the best structure to choose for your business. Do you start out as a sole trader; register as a proprietary limited company (Pty Ltd); create a trust or set-up a partnership? Every business situation is different so it’s always best to get professional advice before making a decision. In the meantime, here is a summary of the business structures available for Australian businesses.
This type of business structure is, as the name suggests, a person choosing to trade a business as an individual. It’s the simplest type of business structure to set-up and operate. It’s also an inexpensive way to set-up a business.
As the sole trader, you’ll make all of the decisions about starting and running your business. You’ll also be legally responsible for all aspects of the business; that includes any debts or losses that the business incurs. Of course you also get to keep all of the profits. Operating as a sole trader*:
- Whilst you can still hire people to help in your business, you have full control of your assets and business decisions.
- Requires fewer reporting requirements and is generally a low-cost structure.
- Allows you to use your individual Tax File Number (TFN) to lodge tax returns.
- Has unlimited liability therefore all your personal assets are at risk if things go wrong.
- Your business losses may be offset against other personal income earned. However, this is subject to certain conditions so talk to your accountant first.
- Doesn’t require a separate business bank account, unlike a company structure. Opening a separate business bank account is a good idea though, because it enables you to easily keep track of your business income and expenditure. You must keep financial records for at least 5 years.
- If you’re a business owner without employees, there’s no obligation to pay payroll tax, superannuation contributions or workers’ compensation insurance on income you draw from the business.
- There are compulsory obligations that you must comply with if you employee people. These include, workers’ compensation insurance and superannuation contributions.
- It’s relatively easy to change your business structure if the business grows, or if you wish to wind things up and close your business.
A company is a complicated business structure. As such it’s more expensive to set up and has higher administrative costs. You’ll also need to register your company with Australian Securities and Investments Commission (ASIC). Companies also have additional reporting requirements and compliance. Plus any company officers or directors engaged must comply with legal obligations under the Corporations Act 2001.
If you’ve decided to register a company as your business structure, the company can incur debt and sue or be sued. In fact, a company has the same natural rights as an individual. As such, company owners or shareholders can limit personal liability and are generally not considered liable for company debts. A company*:
- Is a separate legal entity.
- Has limited liability compared to other structures.
- Is a more complex business structure to start and run.
- Involves higher set up and running costs than other structures.
- Requires you to understand and comply with all obligations under the Corporations Act 2001.
- Business operations are controlled by directors. The company is owned by the shareholders.
- Must be registered for goods and services tax (GST) if the annual GST turnover is $75,000 or more. The registration threshold for non-profit organisations is $150,000.
- Means the money the business earns belongs to the company.
If you’ve decided to start a business with a number of people, a partnership is the best structure for your business. In a partnership, you’ll be jointly running a business with your partner(s). Whilst partnerships are generally low cost and easy to set-up, your must register your partnership according to the law in your state or territory. Key aspects of a partnership*:
- A partnership requires a separate Tax File Number (TFN).
- The partnership must apply for an Australian Business Number (ABN) and use it for all business dealings.
- It’s not a separate entity – you and your business partner(s) are personally liable for the debts of the business.
- You have shared control and management of the business with your partner(s.
- The partnership doesn’t pay income tax on the income earned. You and each of your partners pay tax on the share of the net partnership income you each receive.
- Each partner is responsible for their own superannuation arrangements – you are not an employee of the partnership.
- You must be registered for GST if the annual income turnover is $75,000 or more.
A trust is a fiduciary obligation imposed on a person known as a trustee. The trustee is then responsible for holding property and assets for the beneficiaries of the trust. Call in the experts if you decide to set-up a trust. It’s a complicated and expensive structure to set-up and operate.
Trusts require a formal trust deed that outlines how the trust operates and the trustee has to undertake formal yearly administrative tasks.
If you decide to operate your business as a trust, the trustee is legally responsible for its operations. However, a trustee of a trust can be a company, providing some asset protection.
*information courtesy of www.business.gov.au