There are four commonly used business structures in Australia, each with their own advantages and disadvantages. It’s important to decide which one is right for you, as it can affect certain aspects of your business, including the tax you’re liable to pay. Let’s take a high level look.
One of the most common business structures is that of a sole trader. The Australian Taxation Office (ATO) defines this structure as an individual running a business. Not only is it one of the simplest structures to set up, but also one of the most affordable.
As a sole trader, you will use your individual tax file number to complete your tax return and report your income. You will need to apply for an Australian Business Number (ABN) and register for GST if your annual GST turnover is $75,000 or more. You may need to set money aside quarterly, known as Pay As You Go (PAYG) instalments, in order to pay your tax at the end of the financial year.
A partnership is common when friends or a group of people decide to carry on a business and distribute the income or losses among themselves. Similar to a sole trader, a partnership is relatively inexpensive to set up and operate. While it is not required, the ATO recommends a written partnership agreement is drawn up to outline how the business will be controlled and the income distributed.
Like a sole trader, a partnership is required to have an ABN and register for GST. The business will also need its own tax file number and an annual partnership return has to be lodged every year. Instead of the partnership paying income tax on profits, each partner must individually report their income from the partnership on their own tax return.
With higher set-up costs, the third option is a company. A more complicated structure than a sole trader or partnership, a company is run by its directors and owned by its shareholders. In this business structure, the company must apply for a tax file number and register an ABN. You will also need to register for GST if the company has an annual GST turnover of $75,000 or more.
The company will own the money that the business earns and will be required to lodge an annual company tax return. Tax has to paid at the company tax rate, most likely using PAYG instalments.
The fourth business structure is a trust. It is likely to be the most expensive structure to set up, as a formal deed outlining how the trust will operate is required. The trustee is legally responsible for the operation of the trust, which can be an individual or a company. The profits from a trust must go to the beneficiaries.
A trust requires a tax file number, an ABN and it must be registered for GST if it has an annual GST turnover of $75,000 or more. The tax aspect of a trust is more complicated than other business structures, depending on how the income is distributed and how the deed is worded.