Your business structure, also known as your legal structure, refers to the way your business is organized and how it will be taxed by the government of Australia. When you begin your own business in Australia, there are six different types of business structures you can choose from, each with their own benefits and drawbacks. It’s important to understand the pros and cons of each structure before you make your decision on what type of business structure you’ll start up. In this article, we’ll take a closer look at these five structures and what each one has to offer.
A sole trader is an individual running a business on their own. As a sole trader, you are personally liable for all debts incurred by your business. This means that you may lose your personal assets if something goes wrong with your business. This can be particularly dangerous because many new businesses don’t bring in any money straight away and can easily become financially strained. Sole traders can choose to register as an Australian Business Number (ABN) holder which allows them to charge GST and pay tax deductions from their income, but it also involves paying annual tax. There are no set-up costs for starting a sole trader, but you will need to register as self-employed with Australian Taxation Office (ATO).
Advantage of sole trader business
You are responsible for everything that happens to your business, but you also have complete control over it. You can change anything about it at any time. While there is some red tape involved with sole traders (you must register for GST), there are generally lower upfront costs involved with a sole trader business compared to other business types. That said, personal liability is a downside — if your business fails, you may be personally liable for debts and repaying creditors may not be possible until all assets (including your house) have been sold off. To offset these risks and costs, get help from an accountant or lawyer who knows small businesses before taking on sole trader status.
Disadvantage of sole trader business
The downside of a sole trader structure is that they are an unincorporated business, meaning they can’t protect their personal assets from their business liabilities. For example, if your sole trader goes bankrupt and owes money to creditors (such as other businesses), your personal assets such as your house could be at risk. And without corporate structures such as companies or trusts to protect them, it may impact on how much tax you pay. Before choosing a business structure for your new venture, consider all options and consult a legal expert or accountant for professional advice.
Pty. Ltd. (or Pty.)
This is a general-purpose structure. Pty. stands for private limited, which means that company shareholders are protected from personal liability. The company also has its own legal identity and can, therefore, enter into contracts as well as sue or be sued. Profits are taxed at 30 percent and distributed to shareholders, who must then pay tax on those dividends. It’s worth noting that an Australian Pty. Ltd., unlike a U.S.-based LLC, does not limit owners’ ability to sell their interests—the shares can change hands freely among family members, for example. That’s why some businesses adopt another structure if they anticipate that ownership will transfer hands frequently over time (for example, among siblings).
Company limited by shares
This is a company which has issued shares to raise capital. The rights, obligations and financial interest of shareholders are set out in a constitution document drawn up when a business limited by shares is incorporated. Shareholders vote at general meetings on major issues such as appointing directors and corporate actions such as buy-backs or buy-outs. In these types of companies, there can be one or more layers of directorships. There is no limit to how many people can be directors of a company limited by shares – some have more than 20!
A partnership is a relationship between two or more people who have agreed to combine their money, property and effort to make a profit. Each partner shares equally in the ownership of any profits and losses incurred by their business enterprise. As each partner is liable for all debts and obligations, it is important that any new partners are thoroughly screened before joining an existing business. A partnership can be set up relatively quickly with few formalities required. If you’re considering starting a partnership, it’s important to get advice from your accountant or legal adviser regarding registration and taxation requirements.
A trust is an arrangement where property is held by one party (trustee) for the benefit of another (beneficiary). A trustee has a legal obligation to use, or at least try to use, that property for his or her beneficiary’s benefit. In some cases, it can be difficult to differentiate between a trust and a company. However, one important difference between these two business structures is that if you are running your business through a company, you will still be personally liable if something goes wrong with your company but if you put your assets into a trust and form it properly you will not be liable as everything will belong to the trust fund.