Sole traders, companies, partnerships and trusts – there are many Business Structure Types and we’re going to tell you everything you need to know about them.
If you’re unsure which one will work best for you, keep reading below, or come see us at Stellar Accounts and we’ll help work out the best structure for your business.
Types of Business Structures
There are four types of business structures that your business is likely to fall under:
- Sole Trader
Always seek advice from your own personal accountant or Deb at Stellar Accounts for advice on what structure is best suited to your needs. Entering into the wrong structure could prove costly to your business should it need to be changed.
Operating as a Sole Trader
This is the simplest and most cost effective to use when first starting out in business. As a sole trader all you do is record your business income and expenses in your own personal tax return.
However, once you start trading at a profit you will pay income tax at your applicable individual marginal tax rates. Also, the potential to split income between family members does not apply if you’re a sole trader. Setting up as a sole trader does not provide you with any asset protection from creditors or protection in the case of any family break ups.
To start trading as a sole trader you will need:
- an Australian Business Number (ABN) in your own name.
- you can register a business name if you like.
- you can also register for GST if you’re over the $75,000 sales mark or if you wish to.
Partnership Business Structure
A partnership is a business that includes a number of people who carry on a business together. There are 2 types of partnerships: General and Limited. Most people will go into a general partnership.
Partnerships are governed by the relevant law depending on your state or territory. It is best, no matter who you are entering into a partnership with, to ensure you have some sort of legal agreement in place, if things were to go wrong.
Key aspects of a partnership structure:
- It’s relatively easy and inexpensive to set up.
- Partnership requires a separate Tax File Number (TFN).
- If you’re carrying on an enterprise you can also apply for an Australian Business Number (ABN).
- If setting up a new partnership you need a new TFN and new ABN.
- In a partnership, you and your business partners are personally liable for the debts of the business.
- You have shared control and management of the business with your partners. So, if you’re in a partnership make sure you know everything that is going on because you are just as equally liable as your partners.
- A partnership doesn’t pay income tax on the income that it’s earned, you and your partners will pay tax on the share of the net partnership income that your receive via your own personal tax returns.
- Each partner is also responsible for their own superannuation arrangements as you can’t be an employee of a partnership.
A company is a separate legal entity to the people who run it. If you are the directors of a company, it is still a separate legal entity, as it’s not your money, it’s the company’s money.
- With a company it means it lodges its own tax return and it also pays tax on its profits. At the moment it’s at 27.5 cents in the dollar. The company can then distribute profits to its shareholders in the form of frank dividends. These dividends are taxable to the shareholders as a credit for the tax already paid by the company. Frank dividends are only available to companies paying tax on any profits.
- There is also asset protection benefits because creditors of the company cannot access the assets of shareholders however, this depends on why the company is in trouble. If it’s because of some fraudulent or illegal dealing, then the assets of directors can come under scrutiny and may be available for creditors.
- One of the key differences between a company and a sole trader is when you use company funds for personal expenses or if you withdraw a wage etc, you are then taxed at individual marginal tax rates.
- Superannuation is also payable on wages taken from the company and that is all wages from the company from directors right down to employees.
- Loans between companies and directors also need to be repaid by June 30 each year, otherwise the directors have to pay interest to the company under division 7A.
- A Company Structure also needs a TFN and ABN and if applicable, to register for GST.
Business Structure as a Trust
This is the type of business structure where a trustee, which is usually an individual or company, carries out business on behalf of members or beneficiaries of the trust.
- Family businesses will often set up as trusts so that each member can be made a beneficiary without having any involvement in how the business is run.
- A major advantage of using a discretionary trust to run your business is you’re able to decide who benefits from the trust profits.
- When your trust starts trading profitably, your trustee will be able to distribute income in the most tax effective way permitted by the trustee typically to the beneficiaries with the lowest marginal tax rates.
- There’s also asset protection advantages in holding assets through a discretionary trust as the beneficiaries of the trust are not legal owners of the business, creditors cannot easily access the assets of the business if a particular beneficiary encounters financial problems.
- The downside of investing through a trust is the tax losses will be trapped in the trust as a trust cannot distribute loss to beneficiaries.
- Things to consider children can only receive $416 without being taxed at top marginal tax rates.
- Once you have decided on individual or corporate trust, you then need to get your ABN, TFN and decide whether to register for GST.
Setting up a new business can be quite daunting and trying to decide which of these four business structures will best suit you, should be discussed with an accountant.
At Stellar Accounts we do business consults and talk to our clients about the business structure that is best for them as well as covering the implications of each one.
Stellar Accounts is Brisbane’s leading small and new business accounting firm. We have a reputation for simplifying your accounting, tax and bookkeeping needs so you don’t need to stress or worry.
With more than 20 years’ experience across a wide array of industries – our clients (typically small and medium sized businesses) – gain a distinct advantage over their competitors because we keep them in the loop of the latest information and regulatory requirements. Call us on 0428 887 104.
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