We’ll take you through some key facts for successfully choosing a business structure in Australia and give you the dirt on how to build your new brand empire not just brilliantly, but legally
When you set up a business in Australia you need to define what business structure you plan to operate with. Eh? A what now? Don’t worry, it’s not complicated but it is super important. A business structure refers to the way your business is legally set up. The structure you choose will impact the licences you require, your taxes, your status within the business, your personal liability and how much control you have over the business. So as we said, choosing a business structure in Australia that’s right for you is muy importante.
There are four main types of business structure: sole trader, company, partnership and trust. In this blog, we provide a high-level overview of all four structures to help you better decide which is the best fit for you and your business.
Setting up as a sole trader is a popular choice for small business owners. It’s the easiest business structure to set up and doesn’t require a separate bank account. Note, it is recommended you have a separate account to enable easier tracking of your business income and expenditure. Imagine the tax nightmare otherwise?! Also, financial records for your business need to be kept for at least 5 years. Trust us, a separate bank account is just easier.
When you operate as a sole trader, you operate as a single entity--yourself. All taxes are filed under your personal tax return (which means you use your personal TFN) and you are personally liable for all debts and any legal action.
Personal liability should not be taken lightly. We aren’t in the business of scaring people off, far from it, we want you to shine! But we do want you to proceed with caution. As a sole trader, you will have unlimited liability meaning all your personal assets will be at risk if anything untoward should occur. If you had to pay off a huge debt, for instance, your savings account, your property, your car, and anything else you have of value would be considered fair game. One way to offset this risk is to have the right business insurance and to take the time to ensure you set up and operate your store legally.
- To operate as a sole trader you’ll need to register your business name and apply for an Australian Business Number (ABN).
- You may also need to register for Goods and Services Tax (GST) if applicable.
- You have full control of your assets.
- You have full control over business decisions.
- You can employ people (but there are compulsory obligations you must comply with such as workers compensation insurance).
- It’s easy to change your business structure down the line.
- Full personal liability.
- You are liable to pay tax on all income.
- You may have a limited capacity to raise capital.
Whereas a sole trader is personally connected to their business, a company operates as its own legal entity. A company is owned by shareholders and run by directors. All the money a company makes belongs to the company and not any individual person. Similarly, all property and assets acquired by a company belong to said company. You know all those stories you hear about founders ousted from their own companies? This can happen because while a founder may set up a company, they do not own it the same way a sole trader owns their business.
Because a company is a standalone entity, company directors can reduce their personal liability and better protect their personal assets. However, take note, while choosing a company structure can limit liability, it will not automatically protect your personal assets. It’s important to do your research and fully understand your legal and personal responsibilities when it comes to running a company.
In general, setting up a company is more complex and has higher administrative costs than other setups.
- Companies must be registered with the Australian Securities and Investments Commission (ASIC) which will issue you with an ACN.
- Companies must apply for a tax file number (TFN) and use it when lodging annual tax returns with the Australian Taxation Office (ATO).
- Companies must be registered for GST if annual turnover is $75,000 or more.
- The rules you must comply with when managing a Company are set out in the Corporations Act 2001.
- Companies may requirement legal documents like a Shareholders Agreement.
- Limited personal liability.
- Tax advantages.
- Increased legitimacy.
- Expensive to set up.
- Stricter regulations.
- Additional administration and tax reporting
In some ways, a partnership is similar to a sole trader set up. When establishing a partnership, you and your partners are personally liable for any debts accrued by the business. You also pay tax individually based on the net partnership income you receive, the partnership itself does not pay income tax.
A partnership can be made up of 2 to 20 people. There are some exceptions to this as laid out in the Australian Corporations Act. For example, 400 legal practitioners can enter into a partnership! If you have ever watched the show The Good Wife, all that talk about “partners” might make more sense to you now.
As with all business structures, there are pros and cons to entering into a partnership. Firstly, you want to ensure you thoroughly trust your potential business pals. A partnership allows you to pool assets with your partners giving you stronger leverage but it also leaves you vulnerable to your partner's debts. If a partner was to incur debt through your joint business, then all partners would be liable to pay for said debt.
When entering into a partnership you can set rules with a Partnership Agreement. This is a legal document that outlines the responsibilities of each party, determines how new partners can be added, how the partnership can be exited and so on.
Partnerships are governed by state and territory law and so you should familiarise yourself with the partnership Acts relevant to you. Links to each partnership act can be found here or individually set out below:
- ACT - Partnership Act 1963
- NSW - Partnership Act 1892
- NT - Partnership Act 1997
- QLD - Partnership Act 1891
- SA - Partnership Act 1891
- TAS - Partnership Act 1891
- VIC - Partnership Act 1958
- WA - Partnership Act 1895.
- There are two types of partnerships, general and limited.
- Partnership tax returns must be lodged with the ATO.
- Partners are responsible for their own superannuation arrangements.
- Partners in business have shared control in management.
- Easy to set up.
- Low administration costs.
- Shared workload.
- Pooled assets.
- Joint liability.
- Liable for debts accrued by partners.
- Can get messy if clear guidelines aren’t in place.
If you’ve ever watched an episode of Gossip Girl there is a 99.99% chance you have heard the phrase, “trust fund”. But what is an actual trust? Sadly most TV shows don’t bother delving into the specifics, but we will!
A trust is an entity that holds property or assets on behalf of beneficiaries. In the case of Gossip Girl, a trust holds money for rich NYC kids. In terms of a business structure, a trust holds business assets. A trust is managed by a trustee who can be an individual or a company. When a business operates as a trust, the trustee is the person or entity who is legally responsible for operations.
In general, there are two common types of trusts that tend to be used by businesses. A discretionary trust and a unit trust. A discretionary trust allows the trustee to distribute funds to beneficiaries in a way they see fit. A unit trust predetermines what funds or assets are delivered to beneficiaries based on the number of units held by each beneficiary.
When it comes to tax, the beneficiaries of a trust must include their trust income as part of their personal income. People may choose to set up a business as a trust as it allows more flexibility when it comes to tax. That being said, the ATO has been keeping a watchful eye on trusts to ensure there is no tax evasion.
- Companies can be nominated as trustees.
- Setting up a trust requires a formal trust deed that outlines how the trust operates, this deed will need to be written up by a lawyer (or team of lawyers depending on the scope).
- Trustees have set administrative tasks they must complete each year.
- More privacy afforded compared to a company structure.
- Trustees can distribute income at their own discretion depending on trust structure.
- Depending on set up, liability can be limited.
- Expensive and legally complex set up and maintain.
- Losses can’t be distributed, only profits.
- Borrowing money can be trickier due to different loan structures.
Top Tip: To learn more about business structures watch this great video by the ATO.
If you have decided upon your structure, you will need to think about registering your business and your business name. Regardless of whether you choose to be a sole trader, company, partnership or trust, you will need:
- A registered business name
- Australian Business Number (ABN)
- Tax File Number (TFN)
You may also need to register for GST. We also highly recommend you run a check of IP Australia to make sure your name is not already taken before going to the expense of registering a domain or business name.
Structuring your business properly is a major key 🔑 to long-term success. Spend time giving your company structure serious consideration. The right decision will save you time and money down the track.