When running a business in Australia, it’s essential to decipher which type of structure suits your company’s needs to ensure you pay the correct amount of tax. This guide will detail Australia’s different types of business structures.
What is a Business Structure?
A business structure refers to the way a business is legally organised. When you set up your company, you must decide on a business structure, ensuring your business is recognised as a legal entity and that you have the relevant information on running your business.
The Types of Business Structures
When starting your business, there are a few types of structures that you could choose. Let’s take a look at those options;
Sole Trader
Sole traders are responsible for each business aspect, including day-to-day business decisions and debts. It’s the most straightforward business structure, providing a simple, cost-effective setup. Here are a few primary considerations for sole traders:
- Complete control of assets and business decisions
- Less reporting is required
- Individual tax file numbers accepted for tax returns
- Personal liability to pay tax on all income
- Personal assets are at risk in the event of wrongdoing
- Keep financial records for a minimum of 5 years
Partnership
A partnership involves two or more people distributing income or losses between themselves. There are three main types of partnerships: General partnership, limited partnership and incorporated limited partnership. Here are some key elements of each:
- Easy, inexpensive setup
- Minimal reporting requirements
- Requires separate tax file numbers and annual tax returns to be lodged with the ATO
- Australian business numbers must be used for business dealings
- Partners pay tax on the share of net partnership income each receives, with individual responsibilities on superannuation arrangements
- Register for GST if turnover is over $75,000
Company
A company is a legal entity that will be separate from you, which is different from a sole trader or partnership; your company has the same rights as a person and can be sued, incur debt or sue another entity.
Company members aren’t liable for the company’s debts, with their only obligation being to pay the company any amount unpaid on their shares if required. In contrast, company directors can be personally liable if legal obligations are breached. Here are some other factors to consider:
- Expensive and complex structure to start
- Complying with the Corporations Act 2001 is required
- Business operations are controlled by directors and owned by shareholders
- Money earned belongs to the company, with annual company tax returns required
- Wider capital access
- Annual reviews must be completed
- Directors need to complete a declaration of solvency annually
Trust
With a trust, a trustee will be responsible for your business, holding it to benefit others. Trusts are complicated and expensive, with a trustee dictating how business profits will be distributed to the beneficiaries. Here are some primary considerations when setting up a trust:
- Complex and expensive to start and operate
- Requires a formal trust deed and yearly administrative tasks performed by the trustee to ensure assets are protected
- Challenging to dissolve or change once established
- Often requires a professional for help setting up
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