Choosing a Business Structure

There are four main types of business structure used for doing business in Australia, each with their own advantages and disadvantages. A person can carry on business as a sole trader, in partnership with others, through a trust, or as a company.

A business can also be operated in various combinations of these structures. For example, a business could be operated as a partnership of trusts, each with a company as trustee.

The choice of business structure is an important decision to make at the start of a business venture, as the structure can impact on tax implications and reporting requirements during the lifetime of the business. When setting up a business structure, 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.

Sole Trader

A person can carry on a 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 individual taxpayers.

This is the simplest form of business structure, with lower establishment costs and with 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.

For more information, see our article on sole traders here.

Partnership

Two or more individuals or companies can carry on business in partnership, where the income from the business is received jointly, and expenses shared. Partnerships are relatively inexpensive to form and operate. We recommend partnerships be established under terms of 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.

Partnerships can be formed by two or more parties simply operating together without a partnership agreement. In such cases, the lack of clear agreement about the partners’ rights and obligations is often troublesome.

One significant downside to a partnership as a business structure is that the partners are each personally liable to the full extent of the partnership’s liabilities.

For more information, see our article on partnerships here.

Trust

Under a trust, a trustee owns 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 tasks for a trustee to undertake.

The advantages of a trust are that there is flexibility in income distribution and income can be streamed to low-income beneficiaries to take advantage of their lower marginal tax rate. Furthermore, trust assets can be protected through a properly drafted trust deed.

Like any interposed structure operating a business or investing, using a trust structure creates ongoing compliance costs.

For more information, see our article on trusts here.

Company

A company is a separate legal entity capable of holding assets in its own name. The words “Proprietary Limited” (often abbreviated to “Pty Ltd”) or “Limited” (often abbreviated to “Ltd”) after a business name show that the business is a registered legal entity trading in its own right.

A company is owned by shareholders and directors manage the company’s day to day business and affairs. The shareholders of a company receive company profits in the form of dividends. Shareholders can limit their personal liability and are not personally liable for the company’s debts. Instead, the financial liability of the company is limited to the assets owned by the company itself.

Companies are governed by the Corporations Act 2001 (Cth) and administered by the Australian Securities and Investments Commission (ASIC). There are a number of duties and obligations imposed on company directors, which include the obligation to act in the best interests of the company.

There are ongoing compliance costs associated with incorporating a company.

For more information, see our article on companies here.

Conclusion

Each business and investment type is different and no two business owners’ circumstances are the same.

We recommend you talk to your accountant or solicitor about the costs, risks, and benefits of the various business structures available to you to make sure that the business structure you use is the right one for your business and its future needs.

If you or someone you know wants more information or needs help or advice, please feel free to contact us.

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This article was originally published on 9 December 2016 but was significantly revised and updated in July 2020.
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