Types of Business Structures in Australia: How to Choose the Right One

When considering opening a business, the first and most important consideration is what business structure you will operate with. Here, you’ll learn about the different business structures in Australia, and which one is best suited for you.

In Australia, the four main types of business structures are:

• Sole Trader
• Partnership
• Company
• Trusts

As an entrepreneur, your choice of structure impacts liability, taxation, and growth strategies. Often, a business may begin as one type and later shift to a category that suits it over time. Many successful private businesses utilise more than one type of structure to take advantage of the benefits of each type and limit the disadvantages.

Understanding Business Structures Within Australia

Sole Trader

The sole trader structure is the simplest and least expensive of the four types of business models. You are legally responsible for every aspect of the company, including debts, poor decisions, and losses. There are several crucial factors of sole tradership that you should understand:

• Is simple to set up and operate.
• Gives you complete control of your assets and business decisions.
• Has fewer reporting requirements and is a low-cost structure.
• Allows you to use your tax file number (TFN) to lodge tax returns.
• Do not insist on a separate business bank account.
• Has unlimited liability, so all personal assets are at risk if things go wrong.
• Will not allow you to split profits or losses made with family members.
• Makes you personally liable to pay tax on all the income derived.
• Limits access to tax planning opportunities.
• Is taxed at your marginal tax rate, which may be 45% or higher.

Partnership

A partnership is an arrangement between two or more entities to open and operate a business, sharing income or losses between themselves.

• Fairly easy and cost-effective to set up.
• Have minimal reporting requirements.
• Require their statutory registrations and lodgements.
• The control and management of the business is split between partners.
• Each partner pays tax on the share of the net partnership income they receive, which may include the distribution of a loss.
• The partners are equally liable for the decisions of the other partner.
• Can have complicated capital gains implications when changing partner ownership.
• If no partnership agreement is in place, it can be difficult to resolve partner disputes.

Company

When you use the company business structure, you create a legal entity that’s separate from you. Companies have the same rights as a human, including the ability to amass debts, sue others, and be sued. There are numerous elements of companies you should understand:

• It is a separate legal entity.
• The business structure is well regulated by ASIC.
• A company business structure involves higher set-up and running costs than other structures.
• You must understand and comply with all obligations under the Corporations Act 2001.
• Directors control business operations, and it is owned by the shareholders.
• The company members have limited liability.
• The company owns the money the business earns.
• You must complete an annual review and pay an annual review fee.
• Company directors are required to complete a declaration of solvency each year.
• There is more comprehensive access to capital.
• Company directors are required to have a director ID.
• Companies have access to a flat tax rate, varying from 25% to 30% based on certain circumstances.
• Companies can retain profits to pay out at later times, allowing for additional tax planning opportunities.
• Companies have access to imputation (franking) credits, allowing for additional tax planning opportunities.

Trust

There are many types of trusts, including discretionary, unit, testamentary, self-managed superannuation fund, deceased estate, and bare trusts. At its most basic, a trust is a structure in which one party (the trustee) holds assets and undertakes activities for the benefit of another party (the beneficiary(s)).

A business structured as a trust has a trustee who carries out the business on behalf of the trust’s members or beneficiaries. The trustee can be an individual or a company and is responsible for the ongoing financial and legal obligations of the trust, as well as having a fiduciary duty to the beneficiaries. Trusts are the most complex of business structures and are the most represented in court outcomes.

• Trusts are complex and often operate in areas of conflicting legislation.
• Trusts are established by a legal deed, which governs how the trust must be run and what the powers of each party to the deed are.
• In certain states, trusts require the payment of stamp duty to establish.
• In all states bar South Australia, trusts have a vesting date upon which they must end.
• Trusts are flow-through entities, meaning they do not accumulate profit or pay tax. Instead, they distribute their profits to the beneficiaries by the terms of the deed.
• The flow-through nature of trusts allows you to distribute taxable income among your family members, allowing for additional tax planning opportunities.
• Trusts allow for intergenerational wealth development and can be instrumental in estate planning.
• Trusts have access to the general capital gains tax discount, making them ideal as shareholding vehicles.

Other Considerations

Once you have studied the structures, you should take time to see how each aligns with your vision for your company. You should also consider your need to control and liability factors as well as your risk tolerance. By reviewing your needs, you are ensuring that your business is starting on the right foot.

As important as your needs, you will need to ensure your business is protected against liability. Some business structures are better suited to protect your assets than others. You should also examine how the tax system works for the various kinds of companies, as it varies widely between business structures.

Oftentimes, a successful business will have multiple structures to make it tax efficient, attractive for investment, or for other various considerations.

Making the Right Decision for Your Business in Australia

To make your choice, assess your business’s scale and long-term goals. You should also closely examine the details of liability and taxation considerations. Consulting with your legal and financials can provide excellent insight to help with the decision process.

After choosing your business structure, formalise your choice and register your business to establish its existence.

Origin Business Consultants Are Here to Help

Remember, the right decision lays the foundation for enduring success. Properly aligning your Australian business structure with goals ensures smoother operations and growth.

Be sure to confer with experts who can offer insights to set you on the road to success. For personalised guidance and expert advice, contact our business consultants in Perth. We are here to help you make the best decisions for your business’s growth and success.