You’ve finally decided to bite the bullet and start your own business. Congratulations! Now all you have to do is register your ABN and off you go right?
Wrong.
If only it were that simple.
In reality, there are a number of different ways you can structure your company. With each option offering varying tax and liability benefits, it’s extremely important that you run with the structure that is most suitable to your own business situation.
Please note, the following business structures apply to Australian businesses ONLY. Business structures vary from country to country so please seek local advice that applies to you if you are located outside of Australia.
Here is an overview of business structures available to Australian businesses:
Sole Trader: an individual trading on their own
If you’re operating your business on your own with nobody else involved (employees and/or partners) then operating as a sole trader could be the most appropriate business structure for you. Setting yourself up as a sole trader is generally a simple, low cost operation so it’s often a good option for people who are just starting to go out on their own.
Benefits
- As a sole trader you can use your individual tax file number to lodge tax file returns
- You can operate from your own personal bank account rather than having to set up a company bank account
- You have full control over your assets and business decisions
- Low cost to set up and maintain
- You’re not considered an employee of your business and are free of any obligation to pay income tax
Risks/Negatives
- If things go wrong with your business you and your personal assets are liable
- You are personally liable to pay all tax on income earned
Partnership: An association of people or entities running a business together, but not as a company
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A partnership is a low cost structuring option for business owners who are running their operations in collaboration with other people. Under this structure a separate Tax File Number (TFN) must be set up that applies to all involved parties (an ABN is not compulsory under this structure).
Benefits
- Inexpensive to set up and maintain
- You share control of the company with your partners
- Each partner is responsible for their own superannuation arrangements – which can be beneficial to the company.
- The partnership doesn’t pay income tax on the income earned. Each individual partner pays tax on the share of the net income they receive.
Risks/Negatives
- Like being a sole trader, under a partnership each partner’s individual assets are on the line if you go bankrupt.
Trust: An entity that holds a property or income for the benefit of others
A trust can be expensive to set up and maintain, but it can be an extremely tax effective way of operating when used in the right instances.
Benefits
- A trustee of a trust can be a company (not just an individual) which can provide some asset protection for individuals
- There are often tax benefits associated with trust depending on the situation
Risks/Negatives
- The trustee (person or company) is liable for all debts and legal disputes
- Trusts can be expensive to set up and maintain
- There is a large administrative load of work associated with maintaining a trust that the trustee legally required to complete
Company: A legal entity separate from its shareholders
A company is a separate legal entity unlike a sole trader or a partnership which means the company’s owners can limit their personal liability. Companies must be registered with the Australian Securities and Investments Commission (ASIC) and company officers and directors need to make sure they comply with legal obligations under the Corporations Act 2001.
Benefits
- A company is a separate legal entity which offers protection for the owner’s individual assets.
- The money the business earns belongs to the company (not individuals)
- Business operations are decided by the directors and run by the shareholders
Risks/Negatives
- Involves higher set up and running costs
- A complex business structure to set up and run
As with all things finance, it’s important to consult both a qualified tax accountant and a lawyer when deciding on your company structure. Send us an email on tax@ctrt.com.au to discuss your situation with my team and I today.
