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Business Structure

One of the most important aspects of starting a business is deciding your business structure: who is going to be part of your business and what do you need to do to achieve this?

Deciding on a business structure to suit your needs is vital – look at the advantages and disadvantages of each structure and conclude which one is right for your business.

Sole Trader

A sole trader is in the name: this structure has no separate legal existence of its owner. As a sole trader, you’ll be responsible for the liabilities of your business, including reporting your business income on your personal income tax return along with any other income.

If you choose to be a Sole Trader your benefits are:

  • A simple business structure
  • Can be owned and run by one person
  • No high initial set-up fees
  • Can hire staff
  • Have a tax-free threshold when profits are low
  • Pay your own super
  • Easy to close down

If you choose to be a Sole Trader your downfalls are:

  • Difficult to run globally
  • Difficult to attract capital
  • Personal responsibility/liability for debts/losses
  • If profits are high, taxes will be high

Partnership

This structure is when two or more people start a business and can legally share profits, risks and losses according to the terms set out in a partnership agreement. You must lodge a separate partnership income tax return, and partnerships can be general or limited.

A general partnership is one where all partners are equally responsible for the management of the business, and each has unlimited liability for the debts and obligations it may incur. A family partnership is where two or more members are related to one another.

A limited partnership is one where the liability of one or more partners for the debts and obligations of the business is limited. A limited partnership consists of one or more general partners (whose liability is unlimited) and one or more limited partners (whose liability is limited in proportion to their investment). There is no maximum number of limited partners.

If you choose to be in a Partnership your benefits are:

  • Can hire staff
  • Tax benefits, especially if it’s a family partnership
  • Pay your own super
  • Collectively be responsible/liable for debts/losses
  • Share the load with partners
  • A support system to fall back on

If you choose to be in a Partnership your downfalls are:

  • Cannot be run and owned by one person
  • Start-up fees are high ($359.95)
  • Hard to attract capital
  • Hard to operate globally
  • Hard to close down

Company

This term isn’t as intimidating as it sounds: a company is a legal entity separate from its members (shareholders). A director of a company has additional legal and reporting obligations, and requires you to lodge a separate company income tax return. Companies can also be listed as public companies, meaning the public can buy shares to invest in the company.

If you choose to create a Company your benefits are:

  • Can be owned and run by one person
  • Can hire staff
  • Tax benefits but no tax-free threshold
  • Easy to attract capital
  • Easy to operate globally
  • Pay your own super

If you choose to create a Company your downfalls are:

  • Not a simple business structure
  • High start-up fees (limited share capital: $444)
  • Difficult to close down
  • Extra costs to run a company (registrations, GST, ACN)
  • Legal liability

Trust

A trading trust is usually an entity that holds property (capital) for certain beneficiaries. This type of business structure is formed when a gift or settlement is made to a trustee (a person or a company) on behalf of a yet-to-be-formed trust. A solicitor then draws up a Trust Deed setting out the trust's powers and formalising its administration. You must lodge a separate trust income tax return. While there may be ease of succession in a trust business structure, trading trusts are a complex and expensive business structure and are subject to higher compliance costs.

Whichever structure you decide to go with, we recommend seeking legal advice or the advice of a professional you trust.

This is an important decision as the structure impacts how you operate, tax advantages and disadvantages, how profits and losses are shared, legal obligations and costs, and how to make important decisions.