When setting up your business in Australia, one of the first (and most important things) to do is decide on what business structure you’re going to be operating under. There are several structures to choose from, depending on whether you’re going into business by yourself, in a partnership, or acting as a trust.
Today we’re going to be looking into everything you need to know about the business structures that you can operate under in Australia, so keep reading to find out more!
Key differences between business structures in Australia
There are many key differences between the four business structures we’ll be looking at today – sole trader, company, partnership, and trust. Here’s everything you need to know:
Cost
- Sole trader: Low
- Company: Medium to high
- Partnership: Medium
- Trust: High
Difficulty of setting up
- Sole trader: Easy
- Company: Difficult
- Partnership: Moderate
- Trust: Highly complex
Tax obligations
- Sole trader: Low
- Company: Medium
- Partnership: Low
- Trust: High
Legal obligations
- Sole trader: Low
- Company: High
- Partnership: Low to medium
- Trust: Medium
Responsibilities
- Sole trader: You are responsible for business decisions, debts, and losses
- Company: The directors are responsible for business decisions, and the company is responsible for debts and losses
- Partnership: Business decisions are made by you and your partners, and you’ll share the debts and losses
- Trust: The trustee is responsible for all business decisions, debts and losses
Four Key Business Structures
Sole trader business structure
A sole trader is often regarded as the simplest business structure in Australia, and it’s relatively easy and inexpensive to set up for yourself. As a sole trader, you’ll be legally responsible for the majority of your business, including debts, losses, and business decisions.
Key features of sole traders
Before choosing to operate as a sole trader, make sure you understand the key features. The sole trader business structure:
- Is one of the easiest and quickest structures to set up
- Lets you remain in charge of your assets and business decisions
- Is generally considered a low-cost structure and requires fewer reporting requirements from you
- Lets you use your individual tax number to lodge your tax returns
- Lets you use your personal bank account if you don’t want to set up a new one
- Requires five years of your financial records
- Comes with unlimited liability, meaning all your personal assets are at risk should something go wrong
- Doesn’t let you split business profits or losses with family members
- Puts you in charge of paying tax on all of the income earned
Company business structure
When setting up a company structure, you’re creating a new legal entity that’s separate from you. This means that the company will have the same rights as a person, allowing it to collect debts, sue others, and be sued. Unlike a sole trader structure, you’re not liable for the company’s debts – your only financial obligation is to pay the company any amount unpaid on your shares if you are asked to.
However, directors can be held liable if they’re found in breach of their legal obligations, so it’s vital that you understand what is expected of you as a director.
Key features of companies
There are a few things you should know about the company’s business structure before deciding whether it’s the right option for you or not. Here are the key features:
- A company is a separate legal entity from you
- They’re more complex to set up and run
- You’ll likely face higher set-up costs than other structures, along with higher running costs
- You need to understand and abide by all the obligations set out in the Corporations Act 2001
- Your business will be controlled by directors and owned by shareholders
- Company members have limited liability
- Money earned from the business belongs to the company
- A company requires a company tax return to be lodged every year with the Australian Taxation Office (ATO), along with an annual review and annual review fee
- Directors will need to complete a declaration of solvency each year, and they’ll need a director ID
- The company business structure gives you wider access to capital
- Your company must register for goods and services tax (GST) if your turnover is more than $75,000
Partnership business structure
Partnerships are made up of two or more people who agree to distribute income and losses between themselves. There are three main types of partnerships, including:
- General partnership (GP) involves all partners being equally responsible for the business, including its liability, debts, and obligations
- Limited partnership (LP) includes general partners who have limited liability depending on the amount of money they’ve contributed to the business, often making them more like passive investors
- Incorporated limited partnership (ILP) involves partners with limited liability for the business debts, with at least one general partner with unlimited liability
Key features of partnerships
If you’re looking into setting up a partnership, make sure you consider the key features you’ll need to face beforehand. A partnership business structure:
- Is relatively simple and easy to set up
- Requires minimal reporting requirements
- Requires you to have separate tax file numbers
- Needs to apply for an Australian business number (ABN) and use it for all dealings concerning the business
- Offers shared control and management
- Doesn’t pay income tax on the earnings, as each partner will pay tax on their share of the net partnership income they receive
- Needs a partnership tax return to be lodged with the ATO every year
- Requires each partner to be responsible for their own superannuation arrangements
- Must be registered for GST if its turnover is more than $75,000
Trust business structure
A trust features a trustee who holds the business for the benefit of others, called beneficiaries. A trustee can either be a person or a company, and they’re responsible for everything within the trust, including income and debts. This business structure is often expensive and complicated, so it’s important you have the correct skills to set it up properly.
Key features of a trust
Trusts tend to be complex and time-consuming to set up, so it’s important that you know exactly what it requires before using this structure. A trust business structure:
- Can be expensive to create and operate
- Requires a formal trust deed that includes how the trust operates in writing
- Needs the trustee to undertake annual formal administrative tasks
- Has its assets protected
- Can be difficult to make changes or dissolve once the business has been established
How to choose the right business structure for you
Choosing a business structure is a huge deal and can often be tricky to change once you set the business up, so make sure you choose one that best suits your needs! The business structure you choose is more than just a title – it can also determine several things you’ll need to deal with, including:
- The licenses you’ll need
- How much tax you pay
- If you’re considered an employee or business owner
- Your personal liability should anything go wrong
- Your control over the business decisions
- Ongoing costs and how much paperwork your business requires
As you can see, your initial choice is vital. However, in the lifespan of your business, you may need to change the business structure. This is common as the business grows, and common changes include sole trader to companies or partnerships, or companies to partnerships. You can learn more about changing your business structure here.
Final Thoughts
As you can see, there are major changes between the four main business structures. A sole trader is often best for small businesses where you want to be in full control of your money, decisions, and debts – although you’ll be personally liable should anything go wrong. Companies and partnerships are better suited for businesses where there are multiple people in play, sharing the responsibilities and liabilities.
Trusts are much more extensive and difficult to set up, and they can be more expensive as well. These are often set up for beneficiaries with one trustee overseeing everything, giving you much less share of the day-to-day responsibilities. No matter which business structure you pick, it’s important that you choose the one that aligns with your business the most. While you can change your structure in the future, this can cost more time and money, so make sure you do your research beforehand!
