Before you start a business, there are some facts you will need to know.
The business structure you choose might impact your business registration process; your tax position’ the safety of your personal assets; and the continuity of the business upon change of ownership. On the other hand, the common mistake that business owners have made is choosing the wrong structure at start-up. Therefore, making the right decision is important.
There are 4 types of business structures in Australia:
- Sole Trader
- Partnership
- Company
- Trust
- Sole Trader
A sole trader is an individual running a business. It is the simplest and cheapest business structure. If you operate your business as a sole trader, you are the only owner and you control and manage the business. You are legally responsible for all aspects of the business. Debts and losses can’t be shared with other individuals. You can employ workers in your business, but you can’t employ yourself.
The advantages of sole proprietorship includes owner has direct control over the business and is entitled to all of its success; low costs and minimal legal procedures to start up business; as the business grows you can change structure relatively easily; greater privacy; and easy to disband.
On the other hand, the disadvantages include due to trading alone, Sole Traders bear full responsibility for any liabilities arising out of the business; this can extend to the owner’s personal assets to pay business debts; the Sole Trader has to pay the tax on all the profits.
- Partnership
A partnership is a business structure made up of 2 or more people who distribute income or losses between themselves.
Advantages: Allows a combination of different skills; can receive some tax advantages; usually the Partnership is automatically dissolved on the death of one of the partners; the taxable income or loss of the Partnership is distributed, as per the Partnership Agreement; If no agreement exists, it will be divided equally between the parties.
Disadvantages: The liability of the partners is unlimited, and extends to their private property and Partnership assets; in regards to taxation, a Partnership is required to lodge an Income Tax Return; each partner is responsible for the other partner’s share of the business liability.
- Companies (Pty ltd)
A private company is not listed on the stock exchange and is not included in the description of Australian public company or cooperative. A public company is a non-individual client type. Company is defined to include a body corporate and any other unincorporated association or body of persons but does not include a partnership or a non-entity joint venture.
Advantages: Liabilities are limited to the Company’s assets only. It will not extend to the owner’s assets (with some exceptions); All profits are taxed at one tax rate; Disadvantages: A company is a more complicated and expensive structure to set up due to compliance costs; There are additional legal and financial reporting obligations; It is not suitable for all business start-ups.
- Trusts (Discretionary & Unit)
A trust is an obligation imposed on a person or other entity to hold property for the benefit of beneficiaries. While in legal terms a trust is a relationship not a legal entity, trusts are treated as taxpayer entities for the purposes of tax administration. The trustee is responsible for managing the trust’s tax affairs, including registering the trust in the tax system, lodging trust tax returns and paying some tax liabilities.
Advantages: Can be used to hold property (capital) for Beneficiaries; There is flexibility of income distributions (Discretionary Trust); Discretionary Trusts offer the greatest level of asset protection.
Disadvantages: Can be difficult to dismantle; Need to lodge a separate Tax Return for the Trust; Beneficiaries pay Personal Income Tax on their income distributions from the Trust.
However, given everyone’s circumstances are unique, it’s always best to seek advice from an accountant before making any decisions relating to business structures.
If you need any suggestions and seek assistance, contact BOA & Co. accountants on 1300 952 286, our Specialist will be pleased to assist you.