Business Structures

Different Business Structures and how to choose the right one

Starting your own business can be a big leap and comes with equal amounts of freedom and responsibility. Before you start designing your business cards and setting up your social pages however, it’s a good idea to get your business structure sorted first.

Your business structure plays a key role in determining how much tax you pay, what licenses you require, ongoing costs and how much control you have over the business. By understanding the key differences between business structures, you can decide which structure is right for your business.

Here is a breakdown of the four main business structures adopted by business owners in Australia.

Sole Trader Business Structure: The power is yours

The simplest business structure is that of a Sole Trader. As the name suggests, it’s an individual running a business. A Sole Trader business structure is relatively inexpensive to set up and operate, requiring fewer reporting requirements than alternative business structures. This structure also allows you to use your individual tax file number to lodge tax returns. Sole Traders can claim deductions for costs incurred in business operations. Sole Traders can also employ staff to help run the business but must also adhere to super and insurance obligations.

Whilst the Sole Trader business structure gives a business owner full control over assets and business decisions, it does not provide the flexibility to share debts and losses with other individuals. A Sole Trader has unlimited liability, which means if the business gets into trouble, your personal assets are put at risk. This structure is simple, affordable, but the responsibility & risk is all on you.

Partnership Business Structure: Teamwork makes the dream work

A Partnership is a business structure made up of 2 or more people/entities who distribute income or losses between themselves. Like Sole Traders, Partnerships are relatively easy and inexpensive to get up and running but have the added benefit of a shared liability. They also have considerably less reporting requirements when compared to those of a Company structure. If turnover is $75,000 or more, the Partnership must register for GST.

There are three types of Partnerships:

General Partnership (GP) – this is the most common type. All partners are equally responsible for the management of the business.
Limited Partnership (LP) – is made up of general partners whose liability is based on the amount of money they have contributed to the Partnership.
Incorporated Limited Partnership (ILP) – is a more complex form of Partnership, requiring at least one general partner with unlimited liability. If the business cannot meet its obligations, the general partner (or partners) become personally liable for the shortfall.

Company Business Structure: Geared toward growth

Unlike a Sole Trader, a Company business structure is a separate legal entity. A Company can incur debt, sue or be sued, however as a member, you are not individually liable in most circumstances. A Company business structure is more complex to set up and run. Costs may include registering your Company, registering your business name, setting up separate bank accounts, lodging separate Company tax returns and completing ASIC annual reviews.

Despite a more complex structure, and therefore higher ongoing costs, there are many benefits to forming a Company. As one of the most widely adopted structures, it is well understood and widely accepted. Companies are also ‘investor friendly’, enabling easy addition of shareholders, investors, and co-owners. In this way, a Company business structure is geared toward growth and risk management.

Trust Business Structure: Protecting your assets

A trust is a business structure where a trustee carries out the business on behalf of the trust’s members (or beneficiaries). The trustee can be an individual or it can be a company. A Trust is set up through a trust deed and can be in the form of a discretionary Trust or a unit Trust. Trust’s are complex, both to set up and to manage ongoing. On the flip-side, Trust structures ensure your assets are protected and are also flexible for tax purposes.

Before you commit to a business structure, it’s advisable to have a chat with your accountant to help weigh up your options from a financial standpoint. If you’re just starting out, or are an established business looking to restructure, book in for a chat with our team.

References

https://www.ato.gov.au/Business/Starting-your-own-business/Business-structures—key-tax-obligations/