If you are considering starting a business or have already started, it is important to think about and get advice on the business structure you should have. The differences between the four main business structures in Australia can really affect your business’s present and future. Therefore, it is important to seek advice on the best business structure for your business in accordance with your future business projections.

 

There are four main business structures in Australia. Which one is right for you?

Sole trader

The owner is a sole proprietor who controls and manages the business.  This structure is appropriate where the business is small, and the capital investment is minimal. A sole trader can employ people.

Key advantages:

 

• • Simple and inexpensive to set up

• • Minimal record-keeping requirements for legal and tax purposes

• • The owner retains all the profits and is responsible for all debts and liabilities

• • The business structure can be changed easily

Key disadvantages:

The key disadvantage is that the owner has unlimited legal liability for all expenses and debts of the business, which means that personal assets can be used to pay for business debts. This is the main reason we rarely recommend the use of this structure for a business despite the higher setup cost of the other business structures.

As the business becomes more profitable, you’ll start to pay tax at the highest marginal individual income bracket quite quickly.

 

Partnership

A partnership business structure consists of two or more people (up to 20) who hold joint ownership of a business.  Partnerships are an effective way of combining expertise, knowledge, resources, and additional finances to run a successful business.

Key advantages:

 

• • Partnerships are easy and inexpensive to establish – a written partnership agreement is not mandatory but is strongly recommended

• • Additional owners bring new capital investment and skills to the business

• • Can change business structure easily.

Key Disadvantages:

The key disadvantage is that each partner is personally for the debts of the partnership which means that personal assets can be used to pay for business debts. This is the main reason we rarely recommend the use of this structure for a business despite the higher setup cost of the other business structures. Your personal assets are at high risk.

As the business becomes increasingly profitable, partners will be taxed at higher marginal tax rates.

Income splitting to reduce tax beyond the partners is not possible.

Disputes between partners occasionally arise which may hinder the operation of the business

Transfer of ownership from one partner to another person can be complex.  If a partner leaves, retires or dies, the partnership usually has to be dissolved. 

 

Pty Ltd Company

A company is a separate legal entity with its income tax liability. 

The business structure has at least one director and one shareholder (who can be the same person) and can have up to 50 non-employee shareholders. The business then becomes a separate legal entity from the original business owner. This means the company itself can own assets and enter contracts directly with third parties.

This type of business structure would be useful for a small business that needs restricted liability with flexibility and tax advantages.

Key advantages:

 

• • Set-up and ongoing costs of a company are higher than those of a sole trader and partnership

• • A company pays income tax on its taxable income for the year at a fixed rate (currently 25%)

• • Reduced personal responsibility for any business debts and liabilities and the company is a separate legal entity. The liability of the shareholders is limited to the share capital they have subscribed to and any debts which they may have personally guaranteed, so the personal assets of shareholders cannot be seized to pay company debts.  Company directors may still be liable for any debts, liabilities and legal actions held against their company. 

• • Company tax rates are much lower than the higher marginal tax rates and is therefore far more tax effective once your business earns over a certain amount.

• • Easier to raise finance.

• • Transfer of company ownership can be relatively easy; the company doesn’t have to be wound up in the event of the death, disability, or retirement of any of the key people in the business.

Key Disadvantages:

The process of establishing a company is complex and there are stringent tax reporting, administration and record-keeping requirements

More paperwork, reporting and ongoing compliance requirements and costs.

You must understand and comply with all obligations under the Corporations Act 2001.

 

Family or Discretionary Trust

The fourth business structure is a trust is an arrangement where one party, the trustee (either a person or a company), carries on a business and holds assets for the benefit of the other parties, the beneficiaries.  The most common form of trust is a discretionary trust, also known as a family trust.

 All income of the business goes into the trust and the trustee has the power to decide how to distribute the income to the beneficiaries.  Beneficiaries of a trust pay tax on income they receive from a trust at their marginal rates.

Key advantages:

 

• • A trust provide flexibility as to which beneficiaries are distributed income depending on their personal tax position.

• • Ability to stream any capital gains to beneficiaries who have capital losses or can access the general 50% discount, subject to the relevant trust deed.

• • Ownership of the business by a corporate trustee provides asset protection and limits liability about the business

• • Beneficiaries of a trust are generally not liable for the debts of the trust – assets of the trust may be controlled by the beneficiaries, but they are not owned by them.

Key Disadvantages:

A trust is a complex structure that must comply with specific regulations, so establishing a trust needs to be done by a solicitor or accountant – this can be expensive

 

How to choose a business structure?

It is imperative that you choose the right business structure for your business before you start trading as it is difficult to change when the business is established and trading.

You will need to think carefully about:

 

• • the type of business you are going to run;

• • its risk profile;

• • plans for growth;

• • the involvement of others; and

• • how to come to decisions.

The following table may assist you:

Business Structure	Sole Trader	Partnership	Company	Trust
Expensive to register	No	No	Yes	Yes
Difficult to set up	No	No	Yes	Yes
Complete control over decision-making	Yes	No	No	No
Limited Liability	No	No	Yes	Yes
Easy to raise capital	No	Yes	Yes	Yes
Easy to dissolve or sell	Yes	Yes	Yes	No
Tax benefits	No	Yes	Yes	Yes
Can I retain all profits made?	Yes	No	No	No
Can I change structures easily?	Yes	No	No	No

 

How Can Prosperity Accountants Help?

Prosperity Accountants has an advisory package called StucturePRO which provides business structuring advice for businesses and individuals, and can assist you when choosing the right business structure for your business and preparing the relevant paperwork to ensure you’re off to a good start.

Submit the form and let us know how we can help you.