There are many factors that contribute to the financial success of your business in Australia, and one of them is the type of business structure you choose.
The business structure you need depends on many factors for example, the type of business you have, whether you plan to hire employees or team up with a partner and how you plan to develop your business in the long term.
There are four types of business structures in Australia, and each has advantages and disadvantages.
Business structure 1: Sole trader
A sole trader structure is relatively easy and inexpensive to set up, because there are very few legal and tax formalities.
You control and manage your business alone and your income tax is calculated at personal tax rates. If you earn more than $75,000 a year, you must register for GST.
As a sole trader, you are not considered an employee. This means you’re not required to pay superannuation or payroll tax and it’s quite easy to change the structure down the track should your business grow.
However there are some disadvantages to a sole trader structure.
“You are legally liable for anything that goes wrong in the business,â€ says accountant Michael Jensen, partner with Michael Jensen & Associates in Melbourne. “You need to consider exposure of your personal assets, such as your home.â€
While there are insurance options available for sole traders, Jensen says it’s important to seek financial advice before choosing this or any other business structure.
Business structure 2: Partnership
A partnership involves two or more people entering into business together for the purpose of making a profit.
This business structure has advantages, particularly if you wish to raise finance, as more people are sharing the risk and contributing to the business.
One of the disadvantages of a partnership business structure is that disagreements can occur between the partners. Jensen says it’s important to have a written partnership agreement in place, which defines things such as each partner’s role in the business, profit sharing, their expected financial contribution and procedures for dispute resolution.
“What if one partner decides to sell?â€ Jensen says by way of example. “Do you want the first option to buy them out?
It’s also important to note that all partners are liable if one partner does the wrong thing.â€
Business structure 3: Company
By choosing a company business structure, you are forming a legal entity, which is regulated by the Australian Securities and Investments Commission (ASIC) and can be costly to set up.
A company has shareholders and directors who run operations. You pay income tax at the company tax rate, which is currently 30 per cent, and you may be eligible for tax concessions.
If you choose a company structure, the only way you can access money is to draw a salary from the business or pay dividends.
Unlike a sole trader, a company business structure provides better protection from liability, as it is limited to the company’s assets and not your own personal assets.
A company structure comes with additional record-keeping requirements and other obligations. “If you have a company, you must pay yourself and your employees superannuation,â€ says Jensen.
Business structure 4: Trust
A family or discretional trust can be complex to set up and administer and is subject to extensive regulation. However, it’s awarded greater privacy of information than a company business structure.
A trust has a trustee, such as an individual or company, who carries out the business on behalf of its beneficiaries.
One of the key advantages of a trust business structure is that it provides greater flexibility for how income is distributed, which can have tax benefits.
“With a trust, you can decide how to distribute your profits,â€ explains Jensen. “You can choose to split the income with family members, for example, who become beneficiaries. They then pay income tax on the income they receive from the trust.â€
A trust can also provide greater asset protection and limits liability, as the beneficiaries’ personal finances and assets are not put at risk by the business.