Deciding which business structure to use
1 September 2019
Starting a new business and not sure which business structure to use? Already have a business but looking to take on a partner or investor?
It’s always important to consider the pros and cons of the different business structures in Australia to make sure the structure you choose is the right one for the business and its needs going forward.
In Australia, there are 4 main business structures: sole trader, partnership, company, and trust.
A person can carry on business on his or her own behalf as a sole trader. A sole trader can trade under his or her own name or a registered business name. The income earned as a sole trader is taxed at the same rate as an individual tax payer. This is the simplest form of business structure, with lower establishment costs and minimal legal and compliance requirements.
The main disadvantage of this type of business structure is that a sole trader is personally liable for all obligations incurred in the course of the business.
Two or more individuals or entities can carry on business in partnership where the income from the business is received jointly. Partnerships are relatively inexpensive to form and operate. Most partnerships are established by a partnership agreement which sets out the rights and obligations of the partners. A partnership itself is not taxable, rather each partner pays tax on their share of the net income of the partnership.
The main disadvantage of this type of business structure is that partners are jointly and severally liable for the obligations of the partnership.
A company is a separate legal entity capable of holding assets in its own right. A company is owned by shareholders, and the directors manage the day-to-day operations of the company. The shareholders are entitled to company profits in the form of dividends. Shareholders can limit their personal liability and are generally not liable for the company’s debts. Instead, the financial liability of the company is limited to its assets.
Companies are governed by the Corporations Act 2001 (Cth) which imposes various duties and obligations on company directors. Primarily, directors have a duty to act in the best interests of the company. Incorporation and ongoing administrative and compliance costs are generally higher than other business structures.
Under a trust structure, a trustee holds the property or assets of the trust and carries on the business on behalf of the beneficiaries of the trust. A trustee can be an individual or a company. A formal trust deed is required to set up a trust and there are annual reporting and compliance obligations which the trustee must comply with. As such, it can be expensive and complicated to set up and administer a trust.
The advantages of a trust include flexibility for income distribution which can be streamed to low-income tax beneficiaries to take advantage of lower marginal tax rates. Trust assets can also be protected under a properly drafted trust deed.
When deciding which business structure to use, consideration should be given to factors such as how many people will be involved in the business, what the business will do, how much income is likely to be earned from the business, and the intended growth of the business.
Are you starting a new business or taking on a business partner and not sure which business structure to use? Get in touch and let us guide you through the process.