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How to Find the Right Structure for Your Business

By Adeline Teoh

3 min read

Along with obtaining an ABN and registering a business name, choosing a business structure is one of the most important things to do when starting a business. Here’s why.

There are four business structures available in Australia, each with different legal obligations. The structure you choose for your business will affect:

  •          How much control you have over the business
  •          The level of bureaucracy you’re subject to (licences, paperwork)
  •          How much tax you pay
  •          To what extent you are personally liable for the business and its activities

Every business owner has different plans for their business, and various factors – such as how you anticipate your business will grow – may determine the structure you choose.

Why Go Solo?

The individual or sole trader structure is the simplest to implement and has the least amount of bureaucracy. As the name implies, it is a business structure designed for one person who controls the business. But because the individual and the business are considered the same entity, you are also legally responsible for the business and personally liable for its debts.

Sole trader businesses are taxed as individuals and there are no ongoing costs to maintain this structure.

  •          This structure is ideal for: Business owners who want to stay solo and in full control of their business; individuals who don’t like bureaucracy
  •          This structure is not ideal for: Individuals with high-value assets (e.g. property); individuals whose income attracts a tax rate significantly higher than the company tax rate

It Takes Two (or More)

A partnership is another business structure relatively easy to implement as it is similar to a sole trader structure, except the business is split between two or more partners. In a partnership, control of the business and its income is shared jointly between all partners, as are the legal responsibilities and all business liabilities.

Each partner is taxed as an individual and there are no ongoing costs to maintain this structure.

  •          This structure is ideal for: Business owners with a high level of trust between them
  •          This structure is not ideal for: Any individual partner with a high-value asset

Mixed Company

A company is a discrete legal entity, which means that, unlike a sole trader or a partnership structure, it ‘acts’ as a person and therefore has legal responsibilities. It can accrue debt, sue and be sued, while limiting personal liability for its owners (shareholders).

Setting up a company requires a great deal of paperwork and incurs high set-up and administrative costs compared with sole trader and partnership structures, plus there are ongoing reporting requirements.

The money the company earns belongs to the company. It can give its shareholders money in the form of dividends and pay employees a salary or wage. Its earnings are taxed at the company tax rate, which is lower than most individual income tax rates.

  •          This structure is ideal for: Business owners with high-value assets; high-income businesses
  •          This structure is not ideal for: Business owners who don’t like bureaucracy; businesses for which the additional costs and paperwork would be a burden

In Business We Trust

A trust is a structure where a person, known as the trustee – which may be a person or a company – is obliged to hold property or assets for the benefit of others, known as beneficiaries.

It incurs expenses upon set-up as it requires a formal deed to come into being, and there are annual administrative obligations. The trustee is legally responsible for the business’s operations. The trust may have access to tax concessions.

  •          This structure is ideal for: Business owners who have identified the advantages of a trust for their particular business
  •          This structure is not ideal for: Business owners who don’t like bureaucracy; businesses for which the additional costs and paperwork would be a burden

Business owners have much to consider when deciding on a business structure. Some businesses are simple to set up but

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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