Choosing the right company structure for your business sets the stage for your future development, achievements and overall direction. Your decision will impact your personal liabilities, tax responsibilities, and funding accessibility, directly impacting your business’s future.
Let’s take a look at how you can choose the most suitable company structure for your business and why it’s fundamental to make the right decision.
Choosing the most suitable company structure for your business is essential. It can have legal, financial, and taxation implications that can directly impact the long-term growth of your business. Let’s take a look at why you should take your time choosing the right company structure.
Different types of company structures offer levels of liability for business owners. For example, in a proprietorship or partnership, the owners are personally liable for all the debts and obligations of the company without any limitations.
On the other hand, if you choose a company structure like a limited company (Pty Ltd), your liability as an owner is limited to the extent of your investment in the company. This helps protect your assets.
When you incorporate a company, it becomes an entity separate from its owners. This separation is important because it shields your assets during financial challenges or legal disputes.
The structure of a company can have an impact on its capacity to acquire funding and draw the attention of investors. For instance, Pty Ltd companies have the advantage of issuing shares to generate capital, making them more appealing to investors when compared to structures.
The choice of company structure can significantly impact the taxation obligations of both the business and its owners.
Different structures have varying tax rates, deductions, and reporting requirements. For example, companies are subject to the corporate tax rate, while sole traders and partnerships are taxed based on individual tax rates.
Businesses can choose from several types of company structures, each with its own legal, operational, and taxation characteristics. Let’s take a look at the seven most common structures you can choose for your business.
A sole trader is an individual that operates their business on their own. With full control over their company, they will receive all profits. However, they will be personally liable for any debts or obligations that the business takes on.
In terms of taxes, individual tax rates, rather than business tax rates, are imposed on the owner.
If you register your business as a partnership, you likely are two or more individuals, known as partners, who are going into business together. As partners, you will share the profits, losses, and all management responsibilities depending on your partnership agreement.
All partners are personally liable for the business's debts and obligations and are taxed at the individual partners’ tax rates.
If you register as a Pty Ltd company, your business becomes a separate legal entity distinct from its owners. In this company structure, owners are seen as shareholders with little to no liability. This means their personal assets are protected from having to pay the company’s debts.
Taxes for these companies are based on the ATO's corporate tax rates.
Read more: Changing from sole trader to a company
Like a proprietary limited company, a public company is a separate legal entity whose owners are under no financial obligation. However, a public company can raise capital by offering shares to the public. For example, this could include listing shares on the Australian Stock Exchange (ASX).
Public companies are subject to strict regulatory requirements and reporting obligations compared to a proprietary company. In Australia public companies are required to lodge their annual accounts with the Australian Securities and Investments Commission (ASIC).
A company limited by guarantee is commonly used by nonprofit organisations and charities.
Company members agree to contribute a predetermined amount towards the company’s liabilities if they face financial difficulties. Company members do not have ownership interests like shareholders but contribute to the company's guaranteed amount.
An incorporated association is typically suitable for nonprofit organisations and clubs. Within this business structure, members form an incorporated association under state or territory legislation. Members will have limited liability if the business finds itself in financial difficulties.
A trust is a legal arrangement where one party (the trustee) holds and manages financial assets to benefit another party, known as the beneficiaries.
Trusts are commonly used for asset protection, estate planning, tax minimization, and charitable activities. The trustee has a legal obligation to manage the assets depending on the terms of the trust deed and for the financial benefit of the beneficiary party.
Read more about Trust consideration for Section 100a of the Income Tax Assessment Act 1936.
When choosing the best structure for your business, you need to consider the nature of your business, its goals, and your long-term vision. Factors like the industry you’re operating in, the size of your future company, and growth plans must be considered before you make a decision.
Here’s what to consider before choosing the right company business structure.
Before choosing your business structure, assess your tolerance for personal liability. For instance, are you a smaller business and are just your or another individual? Then you may want to look at a sole trader or partnership structure. Whereas a proprietary limited company may be your best option if you want to protect your personal assets from business debts.
Consider the tax implications of each structure. How will the structure impact your personal and business tax obligations? It may be worth consulting a tax professional to understand each business structure's potential advantages and disadvantages from a tax perspective.
Figure out how much control you want over decision-making within your company. Some structures offer centralised control, like a sole trader or company, while others involve shared decision-making, like a partnership.
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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