Right at the beginning of your Small Business journey, you need to decide which business structure is best for your situation. This will have an impact on the complexity of running it as well as taxation and personal liability implications. This guide will explain your options to help you decide which is best for you.
A business structure is the legal structure in which you set up your business
WHY does a business structure matter?
The practical impacts of this decision can affect how much tax you pay, legal implications like licensing and personal liability, and the control and procedures you have in running your business.
You cannot run a business unless it fits into a business structure.
WHAT are my business structure choices?
The four most common types are:
- Sole Trader – one owner full control
- Partnership – 2 or more owners split income and liability
- Company – a legal entity where liability may be limited
- Trust – a person manages assets for the benefit of others
HOW do I decide sole trader, partnership, company or trust?
This can be a very complicated decision therefore seeking advice from an accountant, lawyer or business advisor could be a worthwhile investment. The good news is that if you change your mind or circumstances change, you can change your business structure at some point in the future.
This is the simplest form of setting up a business and requires the least amount of paperwork but the most risk to your personal assets. If things go wrong, you could lose your house. On a more positive note, you make all the decisions and all the reporting is rolled into your personal tax return.
You will have to keep all records, like receipts, for 5 years and all profits and losses fall back to you and cannot be split. If you hire employees, you are still bound by any government legislation obligations like superannuation contributions and workers’ compensation.
There are 3 types of partnership structures you can consider:
General partnership – all partners are equally responsible for managing the business, and each has unlimited liability for the debts and obligations the partnership incurs.
Limited partnership – is a great tool for partners who want to invest in a business but not be involved in the day to day. Here liability is limited to the amount of money they have contributed to the partnership.
Incorporated Limited Partnership – Put simply one partner has unlimited liability the rest of the partners have limited liability.
Each state has slightly different laws for partnerships and details can be found here:
- ACT – Partnership Act 1963
- NSW – Partnership Act 1892
- NT – Partnership Act 1997
- QLD – Partnership Act 1891
- SA – Partnership Act 1891
- TAS – Partnership Act 1891
- VIC – Partnership Act 1958
- WA – Partnership Act 1895
A partnership must have an ABN and each partner requires a tax file number. Each partner will be responsible for the tax implications on their share of the business and must take responsibility for their superannuation. If a partnership earns more than $75,000 they must register for GST.
A company is the most expensive option to set up and run. It is a legal entity and as such can borrow money, take legal action, and be sued by someone else. As a shareholder of a company whether it be 10% or 100% you are only liable for any unpaid money on your shares. So in theory they cannot come after your house, however as a director of that company, if you are found to be in breach of your legal obligations, you could be sued. A company is owned by its shareholders but controlled by its directors. More information on this can be found https://asic.gov.au/for-business/running-a-company/company-officeholder-duties/ . All money a business makes is owned by the business and an annual tax return must be completed in its name.
You must register for the Goods and Services Tax (GST) if revenue exceeds $75,000. The Australian Securities and Investment Commission requires companies to keep records for 7 years. Directors also have an annual obligation to show a business is solvent which means you can pay your debts and have the cash to run your business.
This is an expensive way to run a business but might have certain tax benefits. A formal trust deed must be established that sets out how the trust operates and also comes with annual formal administration tasks.
According to the Australian Tax Office:
Trusts are widely used for investment and business purposes.
A trust is an obligation imposed on a person or other entity to hold a 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.
Beneficiaries (except some minors and non-residents) include their share of the trust’s net income as income in their own tax returns. There are special rules for some types of trust including family trusts, deceased estates, and super funds.
The Australian government also provides a handy tool to help you decide. https://register.business.gov.au/helpmedecide
This handy guide can help you make your decision. Be sure to select I am not sure. https://register.business.gov.au/helpmedecide
SUMMARY – Research Business Structure
If unsure get some professional help deciding and possibly assisting you to set up your business structure. It comes down to how many owners there will be and how you divide profits and liabilities. For those of you worried about losing your house, this can be protected by insurance as discussed in a separate essential guide on Business Insurance.