There are 4 main types of business structures in Australia, each with its own advantages and disadvantages. A person can carry on business as a sole trader, partnership, trust or company.
The choice of business structure is an important decision to make at the start of a business venture, as each structure has different tax implications and reporting requirements during its lifetime. When setting up a business structure, consideration should be given to factors such as how many people will be involved in the business, what the business will do, how much income is likely to be earned from the business and the intended growth of the business. Consulting an experienced business lawyer is also recommended.
Sole Trader
A person can carry on a business on their own behalf, as a sole trader. A sole trader can trade under their own name or a registered business name. The income earned as a sole trader is taxed at the same rate as individual tax payers.
This is the simplest business structure, with lower establishment costs and with minimal legal and compliance requirements. The main disadvantage of this type of business structure is that a sole trader is personally liable for the obligations of the business.
Partnership
Two or more individuals can carry on a business in a partnership, where the income from the business is received jointly. Partnerships are relatively inexpensive to form and operate. Most partnerships are established by a partnership agreement which sets out the rights and obligations of the partners. A partnership itself is not taxable, rather each partner pays tax on their share of the net income of the partnership.
The downside to this type of business structure is that partners are severally and jointly liable for the debts and obligations of the partnership. There is also potential for dispute and loss of trust between the partners.
Trust
Under a trust, a trustee owns the assets of the trust and carries on the business on behalf of the beneficiaries of the trust. A trustee can be an individual or a company. A formal Deed is required to set up a trust and there are annual tasks for a trustee to undertake. As such, it can be expensive and complicated to set up and administer a trust.
The advantages of a trust are that there is flexibility in income distribution and income can be streamed to low income tax beneficiaries to take advantage of their lower marginal tax rate. Furthermore, assets can be protected through a properly drafted Deed. The disadvantages are that trusts can be costly to set up and there are more compliance and legal requirements.
Company
A proprietary limited company is a separate legal entity capable of holding assets in its own name. The words “Pty Ltd” after a company name show that the company is a registered legal entity trading in its own right (potentially under a registered business name). A company is owned by shareholders and directors manage the company’s day to day business and affairs. The shareholders of a company receive company profits in the form of dividends. Shareholders can limit their personal liability and are not generally liable for the company debts.
Companies are governed by the Corporations Act 2001 (Cth) and there are a number of duties and obligations company directors must abide by. Primarily, directors have an obligation to act in the best interests of the company. Establishment of a company and ongoing administrative and compliance costs associated with the Corporations Law can be high. There is also a requirement to publicly disclose key information.
Conclusion
Each business will vary and no business owners’ circumstances will be the same. It is advisable to talk to an accountant or solicitor about the costs and risks of each business structure to make sure that the business structure used is the right one for the business and its needs going forward.
This article is general information only and you should obtain professional advice relevant to your circumstances. If you or someone you know wants more information or needs legal help or advice, please contact us on 08 9336 6300 or email [email protected].