Business Structures Explained – which is right for you?

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Setting up a business structure

Starting up a small business? Then you will need to decide which type of business structure is going to be best suited to your needs.  Here are the main benefits and disadvantages of the different business structures types.

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 business structure is the simplest. It is not expensive to set up a sole trader business as there are very few legal and tax formalities required to complete the set-up process.

If you choose to operate your business as a sole trader, you will be held responsible for all aspects of the business, this includes any debts incurred by the business and there are no set limits on the liability amounts.

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

Partnership

A business partnership structure is where two or more entities and/or people operate the business as partners or jointly receive income.

Management or control of the business is shared between the partners in this type of business structure.

A business partnership is not a separate legal entity, so all partners are liable for any debts and obligations from the business. It is highly recommended to have a formal partnership agreement, but it is 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 that is imposed on an entity or  person (being the trustee) to hold assets or property (eg assets of the business) to benefit others (the beneficiaries).

A trust is a relatively complex business structure, with higher set-up and administrative costs. To set up a trust you will require a formal deed, and the completion of annual administrative tasks. If your business operates as a trust, then the trustee will be responsible for the operation. There may be tax advantages in using a trust structure for your business. 

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 legal entity separate from yourself. This basically means the company will have the same rights as any natural person and it can incur debt, sue and also be sued. The owners of the company (shareholders or members) can limit their own personal liability and they are generally not held liable for the company debts (unless personal guarantees were given to borrow money).

A company is a more complex business structure, and has higher administrative and set-up costs involved. All companies must be registered with A.S.I.C., and the 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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