Understanding how to choose the right business structure is critical when you’re setting up your business or moving to a new stage of growth. Not only will your business structure affect your tax obligations, but it also impacts your level of legal protection. Here’s an overview of the main types of business structures in Australia and how to choose the right business structure for you.
Types of business structures in Australia
The four most common business structures in Australia are:
- Sole trader
The most simple business structure in Australia is operating as a sole trader. As a sole trader, you are wholly responsible for the business. This means you’re responsible for any debts and losses and all other legal aspects of your business. You’ll need to register for Goods and Services Tax (GST) if your annual turnover is more than $75,000. Under this structure, your tax rate is the same as Australia’s personal income tax rates. This can be a simple and straightforward way to start your business. As your turnover grows, however, you may need to consider changing business structures to minimise your tax obligations and protect your assets.
Another common business structure in Australia is a partnership. This structure is made up of a group of people who split income and losses. When you set up a business under this structure, you may establish a written agreement. This agreement would detail how income and losses are distributed. While it’s not essential to have a written agreement, it’s a sensible idea. Your business partners will have specific tax obligations. It will need its own TFN, and it will need to be registered for GST if your turnover is more than $75,000.
Setting up a company structure is more costly than operating as a sole trader or partnership. If you set up under a company structure, you’ll also have additional reporting obligations to the ATO. One of the key differentiators of a company structure is that it’s a separate legal entity from the company’s shareholders. This can provide shareholders in the company legal protection by keeping business and personal assets separate.
A trust holds property or income for its beneficiaries. Establishing a trust can be complicated and costly, so it’s best to seek the advice and assistance of an accounting professional to help with this process. Like the company structure, there are additional administrative and reporting tasks that must be undertaken in a trust structure.
To understand how to pick the right business structure for you, think about the level of legal and financial protection you need in your business. If you’re a smaller business just starting out, and you’re the only person working in the business, a sole trader structure may be suitable. This structure, however, may make your tax obligations higher as your turnover increases. On the other hand, if you’re focused on asset protection and separation between your personal and professional assets, a company or trust structure could be suitable. While these scenarios provide you with an overview of potential business structures, it’s best to speak with your accountant or lawyer for personalised advice.
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