Basic Business Structures Explained Australia

Basic Business Structures Explained Australia

Having the right business structure in Australia is important for several reasons.

Having the wrong business structure can significantly affect your:

  • Tax liabilities
  • Personal asset liabilities
  • Compliance costs
  • Legal responsibilities

Fortunately, you are not locked into any business structure and you can change the structure as your business changes or grows. It is always best to speak to your accountant, tax specialist, and legal adviser especially when in doubt.

The four most common business structures in Australia are:

  • Sole trader
  • Partnership
  • Company
  • Trust

Sole Trader advantages & disadavantages

The most common type of business structure in Australia is the sole trader. Individuals running a business commonly fall under the sole trader category as it the simplest and cheapest business structure. Many freelancers and sub-contractors are sole traders for the reasons listed above.

Basic fundamentals of sole trader structure:

  • Is simple to set up and operate.
  • Full control of assets and business decisions.
  • Requires fewer reporting requirements and is a low-cost structure.
  • Sole traders lodge tax returns using their individual Tax File Number (TFN).
  • Unlimited liability for sole traders.
  • Losses incurred by business activities may be offset against other income earned, subject to certain conditions.
  • Unlike a company structure, a separate bank account is not required.
  • Sole traders can employ workers in their business, but can’t employ themselves.
  • Sole traders are responsible for their own superannuation.
  • Business profits or losses cannot be split with family and all tax liabilities are payable by the sole trader.

Partnership advantages & disadvantages

A partnership is a group or association of people who carry on a business and distribute income or losses between themselves. This business structure shares similarities to a sole trader structure, albeit with more members. For example, if you and a friend or family member decide to set up a business together, you might operate it as a partnership.

Basic fundamentals of a partnership structure:

  • A partnership is relatively inexpensive to set up and operate.
  • Partners share income, losses, and control of the business.
  • Compliance is much simpler than other business structures.
  • All partners are legally responsible for all aspects of the business. This includes all debts and legal liability.
  • All income, losses, and control of the business are shared among the partners.
  • Losses incurred by business activities may be offset against other income earned, subject to certain conditions.
  • The partners in a partnership are not employees, but the partnership might also employ other workers.
  • Partners are responsible for their own superannuation arrangements.

Please note: A written partnership agreement is not essential for a partnership to exist, but is a good idea. It is a good idea to have a written agreement prior to setting up a partnership. A partnership agreement should outline how income or losses will be distributed to the partners and how the business will be controlled. A partnership agreement can help prevent misunderstandings and disputes about what each partner brings to the partnership, and what they are entitled to receive from the income of the business. This is particularly important for tax purposes if the profit or losses are not distributed equally among partners.

Company advantages & disadvantages

Unlike sole traders and partnerships, a company is a separate legal entity. This means the company has the same rights as a natural person and can incur debt, sue, and be sued. The company’s shareholders/owners can limit their personal liability and are generally not liable for company debts. A company is a complex business structure, more so than other structures such as sole traders and partnerships.

Basic fundamentals of a company:

  • Is a separate legal entity.
  • A company can have limited liability compared to other structures.
  • Is a more complex business structure to start and run.
  • Involves higher setup and running costs than other structures.
  • This means that business operations are controlled by directors and owned by the shareholders.
  • Requires you to understand and comply with all obligations under the Corporations Act 2001.
  • This means the money the business earns belongs to the company.
  • Requires an annual company tax return to be lodged with the ATO.

Trust advantages & disadvantages

A trust is an obligation imposed on a person – a trustee – to hold property or assets (such as business assets) for the benefit of others, known as beneficiaries. Trusts are commonly used in conjunction with a company for tax purposes. If you wish to set up a trust, it is best to speak to an accountant as they are extremely complex and best left to professionals.

Basic fundamentals of a company:

  • Can be expensive to set-up and operate
  • Requires a formal trust deed that outlines how the trust operates requires the trustee to undertake formal yearly administrative tasks.
  • If you operate your business as a trust, the trustee is legally responsible for its operations.
  • A trustee of a trust can be a company, providing some asset protection.

The right structure for you

The best structure depends on many factors such as how much you profit, the ownership structure, and many other variables. It is always best to speak to an accountant when dealing with business structures so that you are not paying more tax than you are legally required to. You may also be leaving your assets vulnerable by having the wrong business structure.

The information here is just a guide and it is always best to speak to a professional when structuring your business. You can also learn more by checking out the ATO website for more information about business structures, which is where most of the information in this guide is from.

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