Australia offers a range of business structures, each with its distinct advantages and disadvantages for entrepreneurs to consider.

Starting a business can be an exciting venture, but it requires careful consideration of the appropriate business structure. The right choice can impact your company’s legal obligations, taxation, and overall success.

The following delve into the types of business structures available and the key points to examine before incorporating your business.

Business Structures in Australia

In Australia, there are several business structures to choose from, each presenting its unique set of pros and cons for entrepreneurs to consider.

Sole Trader

A sole trader is the simplest and most common business structure in Australia. It involves a person who owns and operates the business. Small businesses mostly fall under this category.

Setting up as a sole trader is straightforward and cost-effective. You only need to register for an Australian Business Number (ABN) and keep track of your income and expenses.

As a sole trader, you are liable for all debts and legal issues. This means your personal assets are at risk if your business encounters financial problems.

You will be taxed under your tax file number (TFN), and your business income will be reported on your personal tax return.

 You have complete authority over your business decisions and operations. When it comes to finances, you can direct the earnings to your personal bank account. However, some business experts recommend opening a corporate account for clearer profit or expense accounting.

Partnership

A partnership involves two or more individuals (partners) who share ownership and responsibilities for the business. The government classifies business partnerships into three labels:

• General Partnership (GP). All partners are equally responsible for business operations  and they have unlimited liability for all debts and obligations.
• Limited Partnership (LP). LP’s comprise general partners whose liabilities are limited to the amount of money they have put into the partnership. Limited partners have no say in the business’ daily operations.
• Incorporated Limited Partnership (ILP). ILPs are partnerships where partners can have limited liability for the debts of the business, but at least one of them must be a general partner with unlimited liability. All of them will be personally liable if the business collapses.

Partners share the profits, losses, and decision-making responsibilities based on the partnership agreement. Similar to sole traders, partners are personally liable for the partnership’s debts.

A written partnership agreement is crucial to define the roles, responsibilities, profit-sharing, dispute resolution, and procedures for the addition or removal of partners. 

The partnership itself does not pay taxes. Instead, each partner includes their share of the partnership’s income in their personal tax return.

Company

A company is a separate legal entity from its owners (shareholders). It offers limited liability, meaning shareholders’ personal assets are generally protected from the company’s debts. All businesses operating as a Company are governed by the Corporations Act 2001.

Take the following into account:

• Limited Liability. Shareholders’ liability is limited to the value of their shares, safeguarding personal assets.
• Complexity and Cost. Establishing and maintaining a company involves more paperwork and higher costs compared to other business structures.
• Legal Compliance. Companies must comply with various legal and reporting requirements, including filing annual financial statements with the Australian Securities and Investments Commission (ASIC) and directors filing declarations of solvency every year.
• Taxation. Companies are taxed at a flat rate by the ATO and the returns must be filed every fiscal year. Shareholders may receive dividends, which are taxed at their individual tax rates. 
• Ownership Transfer. Shares can be easily transferred, allowing for potential equity investors and exit strategies.

Trust

A trust involves a trustee who holds and manages assets on behalf of beneficiaries. The trustee has a legal obligation to manage the trust for the beneficiaries’ benefit.

• Beneficiary Distribution: Trust income is distributed among beneficiaries according to the trust deed’s terms, providing flexibility in tax planning.
• Limited Liability: Like a company, beneficiaries’ liability is limited to their stake in the trust.
• Trust Deed: A trust deed outlining the terms and conditions is essential for establishing a trust.
• Taxation: Tax implications vary depending on the type of trust (discretionary, unit, hybrid). Seek professional advice to optimise tax benefits. The Business Registration Service will be in charge of handling trust applications.

Incorporation and Registration

Once you have chosen the appropriate business structure, you need to follow the incorporation and registration process.

• Business Name Registration. Except for sole traders using their legal name, all businesses must register a business name with ASIC.
• Australian Business Number (ABN). All businesses must obtain an ABN, which is used for tax and other business dealings.
• Goods and Services Tax (GST) Registration. If your business’s annual turnover exceeds the GST threshold, you must register for GST with the Australian Taxation Office (ATO).
• Employer Obligations. If you plan to hire employees, you must register for Pay As You Go (PAYG) withholding tax and contribute to employee superannuation, as well as workers’ comp insurance. 
• Licences and Permits. Depending on your industry and location, you may require specific licences and permits to operate legally.

Choosing the right business structure is a critical decision that can significantly impact your success. Consider the legal and financial implications of each structure and seek professional advice to ensure compliance with all regulatory requirements.

DISCLAIMER: This article is for informational purposes only. BARTERCARD has no working relationships with any company. Please consult a business coach.