“Business structure” defines the legal organisation of an entity providing goods and services.
Selecting the right business structure is arguably one of the most vital decisions you’ll make as a business owner. It impacts the way you handle daily operations, how your business is taxed, your liability level, and the legal obligations you need to meet for compliance purposes.
We have compiled a definitive guide exploring each business structure’s requirements, advantages, and disadvantages.
4 Primary Business Structures in Australia
The entity’s size, number of directors or owners, and whether you’ll employ others impact a business’ structure. Review the four common entities below:
Sole Trader
A sole trader is the simplest business structure. You have full control over the business, but are personally liable for all debts and losses. As a sole trader, you can employ others.
Like other structures, you must register for an Australian Business Number (ABN) and GST if your annual income exceeds the threshold. You can also access the 50% capital gains tax.
It’s a relatively straightforward structure that can be easy to set up and run with minimal paperwork and costs. As a sole trader, you’re taxed as an individual and report your business income on your individual tax return.
The main downside of being a sole trader structure is that you incur personal liability for all business debts and obligations. If your business fails, creditors can come after your personal assets, such as your home or car.
Company
A company is a separate legal entity. Shareholders own the company, while directors are responsible for the day to day operations of the business.
Companies have different tax compliance obligations compared to other types of businesses and pay corporate tax at a flat rate on their profits.
Unfortunately, a company doesn’t have access to the same 50% capital gains tax concession that sole traders and partners do.
One advantage of setting up a company structure is that the shareholders’ liability is limited to their investment in the company; they are not personally liable for the business debts and liabilities. So, it’s usually the preferred structure for high-risk business operations that need a solid asset protection strategy in place.
Partnership
A partnership business structure is similar to a sole trader in that the partners are legally responsible for all aspects of the business. However, in a partnership, two or more owners share equally in the profits and losses of the business.
Partnerships are also relatively easy and inexpensive to set up and have fewer compliance requirements than companies. However, each partner is jointly liable for all debts and liabilities incurred by the partnership.
In terms of their tax obligations, partners pay tax on the share of the net partnership at their respective individual tax rates.
Trust
A trust is a legal arrangement where assets are held by one party (the trustee) for the benefit of another party (the beneficiary). There are several types of trusts in Australia, including fixed, discretionary, unit, and hybrid trusts.
Discretionary trusts are often the preferred type in a business structure because of their flexibility. Essentially, a discretionary trust gives trustees complete discretion over how to distribute business profits—which is a popular (legal) tax minimisation strategy. Beneficiaries then pay tax on their distribution share at their personal income tax rates.
Another popular benefit of a trust structure for your business is that it provides asset protection for the beneficiaries. This means that if the trustees are sued, the assets of the trust will not be at risk.
Because the trustee essentially operates the venture on behalf of the beneficiaries, we recommend you appoint a corporate trustee because its shareholders will also benefit from a company’s limited liability.
Unfortunately, one key downside of a trust is that it must distribute all of its income to its beneficiaries. This means that if you have a business that is growing rapidly and reinvesting its profits back into the business, a trust is not the best option. The reason for this is that any profits left in the business would be subject to tax at the highest marginal tax rate.
Contact Glance Consultants today for help, let’s get the best out of your business
