Business Structures Explained – which is right for you?

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Setting up a business structure

If you are starting a small business, you will need to work out which type of business structure to use. We explain the benefits and disadvantages of different types of business structures.

There are four (4) standard structures to choose from:

  1. Sole Trader
  2. Partnership
  3. Trust
  4. Company

We explain each, and the differences between them, below.

Sole trader

A sole trader is the simplest business structure, and it is inexpensive to set up because there are few legal and tax formalities to complete the set-up process.

If you operate as a sole trader, you are responsible for all aspects of the business, including any debts the business incurs and there are no limits on this liability.

Any net income or losses of the business is reported within your personal income tax return.

Partnership

A partnership is two or more people or entities who do business as partners or receive income jointly.

In a partnership, control or management of the business is shared. A partnership is not a separate legal entity, so you and your partners are all liable for all debts and obligations of the business. A formal partnership agreement is highly recommended, but not required.

Any net income or losses of the business is distributed to the partners in accordance with the partnership agreement and reported within the partners income tax return.

Trust

A trust is an obligation imposed on a person or entity, the trustee, to hold property or assets (e.g. business assets) for the benefit of others (known as beneficiaries).

A trust is a relatively complex business structure, with higher set-up and administrative costs. Setting up a trust requires a formal deed, as well as the completion of yearly administrative tasks. If you operate as a trust, the trustee is responsible for its operation. Using a trust structure for your business may have tax advantages.

A trustee can be an individual or a company.  There can also be more than one trustee.

Any net income of the business is distributed to the beneficiaries in accordance with the Trust Deed and reported within the beneficiary’s income tax return.  Losses of a trust are trapped in the trust for future use by the trust.

Company

A company is a separate legal entity. This means it has the same rights as a natural person and can incur debt, sue, and be sued. The company’s owners (called ‘members’ or ‘shareholders’) can limit their personal liability and are generally not liable for company debts (unless they give personal guarantees to borrow money).

A company is a relatively complex business structure, with higher set-up and administrative costs. Companies must be registered with ASIC, and company officeholders have legal obligations under the Corporations Act. Using a company structure for your business may have tax advantages.

Any net income of the business is reported in the company income tax return and taxed at the company tax rate.  Losses of a company are trapped in the company for future use by the company.

Differences between a sole trader, partnership, company, and trust

Here is a snapshot of the key differences between each type of business structure:

Sole Trader Partnership Company Trust
Complexity of business structure Simple Moderate Complex Highly complex
Cost Low Medium Medium to high High
Legal obligations Low Low to medium High Medium
Tax obligations Low Low Medium High
Separate legal entity No No Yes Yes
Liability Unlimited Unlimited Limited Limited (with a corporate trustee)
 

Help choosing a business structure

There are a range of issues to consider with any business structure, including type of business, parties involved, risk of operations, the type of assets of the business and whether you expect to have employees.  It is important to seek advice from an accountant and your legal advisors to ensure the appropriate structure for your business.

At Solve Accountants we specialise in helping clients with complex and challenging issues. Contact us now

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