If you are planning to start a new business, you should know that there are four types of business structures. It is important to identify the most suitable business structure for your business before starting it.
Each business structure has different characteristics varying from each other. These differences can be in terms of business registration process, taxation conditions, profit sharing and so on.
This article will give you a brief idea about the characteristics of the main business structures in Australia. Our goal is to help you to choose the most suitable structure for your business by yourself.
1. Sole trader businesses
This is the simplest form of business structure to start. A sole trader business will be owned by a single individual, hence the decisions will be made by the owner.
Following are the characteristics of a sole trader business.
| Australian Business Number | Must apply for an ABN and use your ABN for all your business dealings |
| Start up | Quick, easy and cheap |
| Decision making and control | The decision making and control will solely be in the hand of the owner. |
| Reporting requirements | Has fewer reporting requirements and has a low cost structure. |
| Separate bank account | A separate bank account is not essential, however it is recommended. |
| Liability of the business | Liabilities of the business are unlimited. This means that the owners personal assets will also be used to settle the remaining liabilities if needed. |
| Profit share | The owner can take the entire profit of the business after paying the due taxes. |
| Business taxes | The due taxes can be filed under the individual tax file of the owner. |
| Tax File Number | Not required |
| Tax rate | Same income tax rates as individual taxpayers. You may be eligible for the small business tax offset. |
| Registration for GST | Registration is required if your annual GST turnover is $75,000 or more. |
| Superannuation | You are responsible to make the relevant super contributions of your employees on their behalf. You can also pay yourself a super payment, into the relevant super account. |
2. Partnerships
Partnership is an entity which is started by 2 or more individuals with an agreement to share the control, profits and losses etc.
A written partnership agreement is recommended when starting the business.
Following are the characteristics of a partnership business.
| Australian Business Number | Must apply for an ABN and use your ABN for all your business dealings. |
| Start up | Higher formalities than sole trader business but still quick, easy and cheap. |
| Decision making and control | The decision making and control will be shared by the partners as per the partnership agreement. |
| Reporting requirements | Have minimal reporting requirements. |
| Separate bank account | Required. |
| Liability of the business | Liabilities of the business are unlimited. The liabilities must be settled with the personal assets of the partners if needed. |
| Profit share | Partners will share the profits as per the agreement. |
| Business taxes | Each partner will pay taxes on their share of the partnership profit. |
| Tax File Number | Required |
| Tax rate | Same income tax rates as individual taxpayers. You may be eligible for the small business tax offset. |
| Registration for GST | Registration is required if your annual GST turnover is $75,000 or more. |
| Superannuation | Partners are responsible for their own superannuation arrangements. But the partnership is responsible for the superannuation of employees. |
3. Companies
Companies are the entities which are owned by the shareholders of that entity. There are two types of companies as Public Companies (listed on stock exchange) and Private Companies (not listed on stock exchange).
Companies are treated as a separate person in the face of law.
Following are the characteristics of a company.
| Australian Business Number | Must apply for an ABN and use your ABN for all business dealings. |
| Start up | Complex requirements, takes time to start and expensive. |
| Decision making and control | The decision making and control will be in the hands of directors but shareholders will own the business. |
| Reporting requirements | Higher reporting standards and requirements. |
| Separate bank account | Required. |
| Liability of the business | Liabilities will be limited to the assets of the business unless a director is legally liable for his actions. |
| Profit share | Profits will be shared among shareholders, and kept as reserves. |
| Business taxes | Taxes must be filed annually as a company. |
| Tax File Number | Required. |
| Tax rate | Company tax rate. |
| Registration for GST | Registration is required if your annual GST turnover is $75,000 or more. |
| Superannuation | Contributions must be paid for the employees including the directors. |
4. Trusts
This is where a business is handed over to a legal third party (trustee) with the legal right to run and control the business.
Trustee can be a person or a company. In order to start a Trust the two parties must have a formal agreement.
| Australian Business Number | Must apply for an ABN and use your ABN for all business dealings. |
| Start up | Complex requirements, takes time to start and expensive. |
| Decision making and control | The decision making and control will be in the hands of trustee. |
| Reporting requirements | Higher reporting standards and requirements |
| Profit share | Profits will be shared based on the agreement |
| Business taxes and rates | May be liable to pay tax depending on the wording of its deed and whether any income the trust earns is distributed to its beneficiaries |
| Tax File Number | Required |
| Registration for GST | Registration is required if your annual GST turnover is $75,000 or more. |
| Superannuation | Contributions must be paid for the employees. |
Which business structure should you choose?
Each business structure has different characteristics. You must analyze them carefully before starting your business.
Contact us if you still have doubts to choose a suitable structure. We are professional consultants who can help you to make the right decision. We have helped hundreds of clients to make right decisions which lead them to success.
Sources: Australian Taxation Office [1] [2] [3] [4], Australian Government Business [5] [6] [7] [8].