Aussie Assist – Business Structures and Advice

Consider your trading structure

  • If you are a business owner, have you taken time to consider whether your current trading structure is still right for you?
  • If you are looking to start a business, the most important decisions you will make is choosing the right legal structure.

Want advice on business structures?

Before you even begin to search for your business you need to know which type of business structure you’ll be operating under. Business structures relate to how a business is owned and managed at the top level.

Are you an individual looking to get your own business off the ground? Do you have a partner with whom you want to build a business? Or maybe you want to create a company or a family business?

Since business structures affect your taxation requirements, legal liabilities, licences, ongoing costs, asset protection, capital, and management requirements, you’ll want to make sure you’ve got the right structure for your needs.

Thankfully, you’re not locked into any structure and it is possible to change it as your business grows or evolves. But some structures are easier to change out of than others. So it’s really important you give your business structure the attention it deserves before continuing in your business-building pursuits.

The four main business structures in Australia are: 1. Sole trader 2. Partnership 3. Company 4. Trust

Each structure serves different purposes. But no one is better than another; each one has its own merits, disadvantages and responsibilities you’ll need to address.

 

Types of Business Structures

1. Sole Trader

A sole trader is arguably the easiest of business structures, because you are working alone or with your married partner (who likely has the same goals as you). Sole trading is, at least, the simplest and the most inexpensive way to begin a business. That’s probably why it’s also the most popular business structure in Australia.

It’s true, as a sole trader, you have much greater control and flexibility over managing your business, coupled with lower taxes and legal concerns. But the flipside is that you’re also solely responsible for your business’s debts and profits. While you receive full profits if you do well, you’re likewise wholly liable for any debts you get into.

You can trade under your own name or register a business name with the Australian Securities and Investments Commission (ASIC).

Income & Tax

You use your own Tax File Number to lodge your income tax return, but you can also apply for an Australian Business Number to use for your business.

In tax terms, your business income is your personal income, so you pay tax at personal income tax rates (just as with individual taxpayers). After claiming a deduction for business expenses, you have to include your total business income alongside any other income in your individual tax return.

You’ll also have to pay quarterly Pay As You Go (PAYG) instalments that contribute to the amount of tax you expect to pay at the end of the financial year.

Super

You’re completely accountable to yourself for your super arrangements. Your personal super contributions may be tax deductible if your nominated fund permits it.

You’re also liable to pay the minimum superannuation contributions to any employees you might have.

Advantages

  • You have complete control and full flexibility to manage as you like.
  • You receive full profits.
  • You can easily change the business structure.
  • There are few legal and tax formalities when setting up.

Disadvantages

  • You are personally liable for any debt incurred by the business; your assets (such as your home) could be under threat.

2. Partnership

A partnership is typically two or more people going into business together to earn a profit. The partners (not usually married couples) agree to contribute money, labour or skills to the business and share the profits, losses and business management responsibilities.

The key difference between a partnership and a company (see below) is that you’re working in a relationship, not a separate legal entity. Each partner is equally responsible for all aspects of business management.

That makes it important (but not obligatory) to have a written partnership agreement before you enter into business together so you all know your rights, responsibilities and obligations. An agreement would cover all aspects of each partner’s role, level of authority, and expected financial contribution. It should also have procedures for dispute resolution and what happens if you dissolve the partnership.

Unless you’re just using the surnames of all involved partners, you’ll usually register a business name with ASIC.

Income & Tax

Your partnership will have its own Tax File Number as well as an Australian Business Number. You’ll lodge an annual partnership tax return alongside your personal tax return. You’ll have to prove all income earned by the partnership, but can claim deductions for business-related expenses.

Since your partnership isn’t a separate legal entity, it doesn’t pay income tax on any income earned. You and your partners pay the tax calculated on the share of net partnership income you each receive.

Your partnership isn’t liable to pay PAYG instalments, but you and your partners may have to contribute instalments based on how much income you each receive from any partnership you’re a part of.

Super

As with sole traders, in a partnership you’re responsible for your own super arrangements (since you’re not one of the partnership’s employees).

You’re also liable to pay the minimum superannuation contributions to any employees you might have.

Advantages

  • Easy and inexpensive to set up.
  • Easier to raise capital for your business.
  • Shared management responsibilities.
  • Combined skills, knowledge and finances can contribute to a better product or service.
  • Easy to dissolve or exit and recover your share.

Disadvantages

  • You and your partner are personally and equally liable for any debt incurred by the business; your assets (such as your home) could be under threat
  • If the business fails and your partner can’t afford to pay their share of the debts, the responsibility is on you to cover the shortfall.
  • You’re equally liable for debts you may not even know your partner had incurred
  • It can be hard to change ownership
  • There can be disputes over business management and profit sharing – make sure you’re on the same page before you set out!

3. Company

A company is a legal entity that has assets in its own name and conducts business in its own right. It’s owned by shareholders and run by directors (who can also be shareholders).

A company itself can sue and be sued, but directors can still be held legally liable for the actions and debts of the company if they’ve shown negligence.

To create a company, you must incorporate an entity under the Corporations Act 2001 (Commonwealth Act) AND register with ASIC. It’s then regulated by ASIC. You can register your company as either proprietary or public.

Proprietary companies have no more than 50 non-employee shareholders and aren’t typically allowed to offer shares to the public. They must have at least one shareholder and one director who lives in Australia.

Public companies can have over 50 non-employee shareholders and be listed on the stock exchange.

Income & Tax

In terms of income and tax, companies are more complex than sole traders and partnerships. Tax for companies particularly varies remarkably from other business structures.

Your company is totally liable for its own tax income and isn’t connected to any individual income tax. Any profit earned belongs to the company. Companies lodge annual company tax returns detailing the company’s income, deductions and income tax.

Companies pay income tax of a standard 30% on their profits. They don’t have a tax-free threshold. But be sure to do your research, because your company may be eligible for some tax concessions, which you naturally wouldn’t want to miss out on.

Alongside a possible Tax File Number and Australian Business Number, companies need an Australian Company Number (ACN). The ACN must appear on the company seal and every public document issued. Once registered, a company name can trade throughout Australia.

Companies generally also pay PAYG instalments, which are then deducted from the total annual income tax.

Super

You’re liable to pay the same minimum superannuation contribution to both yourself (even as director) and your employees.

Advantages

  • Easier to raise a lot of capital for your business.
  • Your own assets can’t be used to pay company debts.
  • Profits can be reinvested in the company or paid out to shareholders as dividends.
  • Easy to sell and pass on ownership.
  • Can carry forward losses indefinitely to offset against future profits.
  • Good for high-risk business ventures.

Disadvantages

  • Harder and more expensive to set up and maintain.
  • You have limited or no control over company affairs.
  • There are complex reporting requirements.
  • Your company can’t distribute losses to shareholders.

4. Trust

Unlike a company, a trust isn’t a separate legal entity. In fact, they’re quite different to any other business structure. Trusts involve a trustee (who can be an individual or a company) who carries out the business on behalf of members (or beneficiaries) of the trust.

Trusts are particularly popular for families who want relatives to be beneficiaries without those relatives having any involvement in the business management.

There are two types of trusts:

Discretionary trusts are when the trustee can choose how to distribute funds to the beneficiaries.

Unit trusts have their interest divided into units, much like shares. Beneficiaries hold a number of trust units, which determine their share of profits.

As a trustee, you’re legally liable for any debts accrued by the trust, but you can use trust assets to offset those debts. Importantly, if there’s a shortfall, you’re responsible for covering it with your own resources.

You’ll need a formal deed to set up a trust, which can be expensive. This deed outlines how the trust will work.

Income & Tax

While the trust isn’t liable to pay tax, as trustee you must still apply for a Tax File Number and lodge an annual trust return. If the trust is carried on as an enterprise, you’ll need to register Australian Business Number for it.

Depending on the trust’s circumstances, it may not need to pay tax. The type of trust, the wording of the trust deed, and the distribution of income to members can determine whether your trust must pay tax. Income tax for trusts can be very complicated, so we advise you research more with the Australian Tax Office.

To put it simply, if your trust is a business, you must report all income the trust earns and any deductions it claims for business expenses on each annual trust tax return. You’ll also declare the amount of income distributed to each beneficiary.

While the trust doesn’t have to pay PAYG instalments, you or your beneficiaries may have to pay them.

Super

You’re liable to pay the same minimum superannuation contributions to yourself as well as your employees.

Advantages

  • Easier to raise capital for your business.
  • You have less liabilities.
  • Your assets can be protected.
  • You have flexibility over asset and income distribution.

Disadvantages

  • Harder and more expensive to set up and maintain.
  • You’re legally liable for any debts the trust incurs.
  • You can’t distribute losses, just profits.
  • Any profits you keep to reinvest in the business will incur penalty tax rates.
  • Not easy to dissolve, change or exit.