Some of the factors to consider in choosing your structure include:
- taxation requirements and liabilities
- legal liability
- management requirements
Your structure should accommodate the potential for changing circumstances with minimal disruption, provide adequate asset protection, opportunities for legitimate tax reduction and efficient distribution of profits.
This is the simplest structure and common for small start-up businesses. As a sole trader, you must report the business income you earn and related deductions on your personal tax return, along with any other income you earn. You pay the same tax as any other individual and you are responsible for your own super arrangements.
- Simple set up and operation
- Control of your assets
- Fewer reporting requirements
- Any losses incurred by your business activities, may be offset against other income earned
- Relatively easy to change your legal structure if the business grows
- Unlimited liability which means all your personal assets are at risk if things go wrong.
- Little opportunity for tax planning – you can’t split business profits or losses made with family members and you are personally liable to pay tax on all the income derived
- Your access to finances is usually limited to your own resources
A partnership involves two or more people (but no more than 20, with some exceptions) going into businesses together in order to make a profit. Although your business does not pay tax, you need to lodge an annual partnership income tax return on behalf of the business to show the total income earned and deductions claimed by the business. The tax return also shows each partner’s share of net partnership income. Partners are not employees. You are responsible for your own super arrangements.
- Simple and inexpensive to set up
- Minimal reporting requirements
- Shared management/staffing responsibilities
- More opportunities for tax planning than that of a sole trader.
- A partner’s share of the business’s tax losses may be offset against other personal income, subject to certain conditions
- Combined skills, experience and knowledge can provide a better product/service
- Access to capital
- Potential for disputes
- Joint and several liability of partners. This means that each partner is fully responsible for debts and liabilities incurred by other partners
- Changes of ownership can be difficult
The business is a distinct legal entity that is regulated by the Australian Securities & Investments Commission. A company is a more complex business structure. Usually, the set-up and administrative costs for a company are higher than for other business structures.
In its separate legal capacity it can hold assets in its own name, conduct a business in its own right and it can sue and be sued. Generally, the owner’s assets cannot be accessed to pay for any company debts or liabilities.
Shareholders own the company while directors run the company. Company directors can also be shareholders and employees.
The tax requirements for a company are quite different to the other business structures. It has its own tax income liability which is totally separate to individual income tax. A company pays income tax at a flat rate of 30% on taxable income.
Your company must make super contributions for any eligible workers it employs, including you as a company director.
- Limited liability for shareholders
- Company structure is commercially well understood and accepted
- Ability to raise significant capital
- Profits can be reinvested in the company or paid out to the shareholders as dividends
- Easy to sell and pass on ownership
- Company can carry forward losses indefinitely to offset against future profits
- Shareholders have little say in the running of the business
- Complex reporting requirements
- Company can’t distribute losses to its shareholders
A trust is a structure where a trustee (as an individual or company) carries out the business on behalf of the members (beneficiaries) of the trust. A trust is set up through a trust deed – which governs the rules of the trust. A trust can be fixed – where the rules for dealing with trust property and distributions must be followed as set out in the trust deed; or discretionary, where the trustee as the discretion in how to deal with trust property and distributions. The trust will have to lodge an annual tax return showing its distribution to the members. In limited circumstances the trustee may have to pay tax on income where it is not distributed to any beneficiary.
- Reduced liability – especially if corporate trustee
- Asset protection
- Flexibility of asset and income distribution
- Difficult to dissolve, dismantle, or make changes once established particularly where children are involved
- Cannot distribute losses
The information contained in this blog is general information and not intended to be specific advice. Information may not meet or be relevant to your specific circumstances. For further information or help please call Award Accounting on (02) 9541 2944.
DISCLAIMER: All information provided in this article is of a general nature only and is not personal financial, taxation or investment advice. It does not take into account your particular objectives and circumstances. No person should act on the basis of this information without first obtaining and following the advice of a suitably qualified professional advisor. To the fullest extent permitted by law, no person involved in producing, distributing or providing the information in this article (including Award Accounting for Business Success Pty Ltd, each of its directors and employees) will be liable in any way for any loss or damage suffered by any person through the use of or access to this information.