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Starting a business

How to choose the right structure for your business

When starting a new business, one of the key decisions you’ll make is its structure. Your business structure will impact the tax you pay, the cost to set up, the compliance admin you need to undertake and your legal protection. The right structure for you will depend on the type of business you want to start, its size and how you want to run it.

It’s worth noting: the structure you choose when starting won’t necessarily stay the same across the lifetime of your business. It’s not uncommon for a business to begin as a sole trader or partnership before moving to a company structure as they grow.

Business structure types

There are four main business structures in Australia, each with its own legal, operational, and taxation characteristics. Read on to find out which is right for your new business.

Popular business structures infographic

1. Sole trader

A sole trader is a business that is owned by a single person. Despite the term ‘sole’, you aren't limited to working alone—you can always hire employees to help you. 

Sole trader is the simplest and cheapest to set up. It takes no paperwork to get started, you can mix your personal and business funds and only need to file a personal tax return. As a sole trader, you have full control over your assets and business decisions, and fewer financial and tax obligations than if you own a company. 

However, that simplicity and control comes with personal risk. You’re also legally responsible for all financial aspects of your business. That means your personal assets—such as your house or your car—can be seized to pay off any debts if the business runs into financial trouble.

Simple to set up and operate

Gives you full control of your assets and business decisions

Allows you to use your individual tax file number (TFN) to lodge tax returns

Has unlimited liability and all your personal assets are at risk if things go wrong

2. Partnership

A partnership is a common structure for businesses with two or more owners. While it’s fairly easy to set up, you’ll need a partnership agreement that determines how profits, losses, management responsibilities and liability are shared between partners. Business and personal funds need to be kept separate and you’ll need to apply for an ABN. Partnership agreement templates can be found online, but if you’re not confident about setting one up yourself, consider speaking with a lawyer or an accountant for help.

Fairly simple to set up and operate

Enables multiple owners to share control and management of the business

You will need to lodge a partnership tax return each year, in addition to your own

Partners are personally liable for the business's debts and obligations

3. Company

Companies are businesses with one or many owners. Unlike a sole trader or a partnership, a company is a separate legal entity distinct from its owners. This separation allows you to limit your liability in the event the business experiences legal or financial difficulties. Companies will often also benefit from a lower tax rate than those that file income tax as an individual.

The upside comes at a cost, however. Companies face far greater legal, tax and compliance obligations than sole traders and partnerships. And while you may save money on tax, you’ll have to cover the considerable initial set-up and ongoing administrative costs of operating a company.

Difficult to set up and operate

Enables flexible ownership and management structure

Requires an annual company tax return to be lodged with the ATO, as well as individual tax returns by members

Limits the liability faced by company members

4. Trust

You can also run a business as a trust, where a trustee operates the business. The trustee can be a person or a company and they run it for the benefit of others called beneficiaries. This is also an expensive way to set up and operate a business and requires a formal legal trust deed to be drawn up, which outlines how the trust will operate. The trustee needs to undertake formal yearly administrative tasks.

To conclude

Choosing the right business structure is a decision that can impact your business's future success and growth. It's a choice that demands careful consideration of legal, financial, and operational implications. 

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