Business structures

One of the key decisions you’ll make when starting a business is its structure. Your choice of structure will depend on the size and type of business and how you want to run it. Each structure may have an impact on key areas such as tax you’re liable to pay, asset protection and costs to set up. There are a number of structures that you can choose from when starting or expanding your business.

When you decide on a structure for your business, choose the one that best suits your business needs. Consider each option carefully, as there are key factors and rules to consider for each structure.

Your business structure can determine:

• the licenses you require
• how much tax you pay
• whether you're considered an employee, or the owner of the business
• your potential personal liability
• how much control you have over the business
• ongoing costs and volume of paper work for your business

You can change your business structure throughout the life of your business. As your business grows and expands, you may decide to move to a different type of business structure.

Before deciding which business structure to use, seek advice from a professional business adviser, lawyer or accountant. 

A sole trader is the simplest form of business structure and is relatively easy and inexpensive to set up.

As a sole trader you are legally responsible for all aspects of your business including any debts and losses and day-to-day business decisions.

If you are looking at starting your business as a sole trader, consider the following key elements. A sole trader business structure:

• is simple to set up and operate
• gives you full control of your assets and business decisions
• requires fewer reporting requirements and is generally a low-cost structure
• allows you to use your individual tax file number (TFN) to lodge tax returns
• doesn't require a separate business bank account, although this is recommended to make it easier to keep track of your business income and expenses
• requires you to keep financial records for at least 5 years
• has unlimited liability and all your personal assets are at risk if things go wrong
• doesn’t allow you to split business profits or losses made with family members 
• makes you personally liable to pay tax on all the income derived

Hiring people as a sole trader

You can employ people to help run your business under the sole trader business structure.

If you do decide to take on any employees there are obligations you must comply with such as workers' compensation insurance and superannuation contributions.

A partnership is a business structure made up of 2 or more people who distribute income or losses between themselves.

There are 3 main types of partnerships:

• General partnership (GP) – is where all partners are equally responsible for the management of the business, and each has unlimited liability for the debts and obligations it may incur.
• Limited partnership (LP) – is made up of general partners whose liability is limited to the amount of money they have contributed to the partnership. Limited partners are usually passive investors who don’t play any role in the day-to-day management of the business.
• Incorporated Limited Partnership (ILP) - is where partners in an ILP can have limited liability for the debts of the business. However under an ILP there must be at least one general partner with unlimited liability. If the business cannot meet its obligations, the general partner (or partners) become personally liable for the shortfall.

If you’re looking at setting up a partnership structure consider the following key elements. Partnerships:

• are relatively easy and inexpensive to set up
• have minimal reporting requirements
• require separate tax file numbers (TFN)
• must apply for an Australian business number (ABN) and use it for all business dealings
• share control and management of the business
• don’t pay income tax on the income earned -- each partner pays tax on the share of the net partnership income each receives
• require a partnership tax return to be lodged with the Australian Taxation Office (ATO) each year
• require each partner to be responsible for their own superannuation arrangements
• must register for GST if turnover is $75,000 or more

A company business structure is a separate legal entity, unlike a sole trader or a partnership structure. This means the company has the same rights as a natural person and can incur debt, sue and be sued.

As a member you’re not liable (in your capacity as a member) for the company’s debts. Your only financial obligation is to pay the company any amount unpaid on your shares if you are called on to do so. However, directors of the company may be held personally liable if found to be in breach of their legal obligations.

Companies are expensive and complicated to set up, and generally suit people who expect their business income to be highly variable, and want the option to use losses to offset future profits.

There are key features you should know if you are looking at starting your business as a company.

A company:

• is a separate legal entity
• is a more complex business structure to start and run
• involves higher set up and running costs than other structures
• requires you to understand and comply with all obligations under the Corporations Act 2001
• means that business operations are controlled by directors and owned by the shareholders
• means company members have limited liability
• means the money the business earns belongs to the company
• requires an annual company tax return to be lodged with the ATO
• requires you to complete an annual review and pay an annual review fee
• directors are required to complete a declaration of solvency each year
• means wider access to capital

Your company must register for goods and services tax (GST) if your turnover is $75,000 or more. The registration threshold for non-profit organisations is $150,000. The Australian Taxation Office (ATO) has more detailed information on your tax obligations as a company.

Companies and directors have key legal and reporting obligations they must comply with. Some of the more common obligations include:

• update ASIC within 28 days of key changes to company details
• keep financial records
• understand and comply with all your obligations as a director

A trust is an obligation imposed on a person (a trustee) to hold property or assets (such as business assets) for the benefit of others, known as beneficiaries.

If you want to set up a trust, keep in mind that trust structures:

• can be expensive to set-up and operate
• require a formal trust deed that outlines how the trust operates
• require the trustee to undertake formal yearly administrative tasks

If you operate your business as a trust, the trustee is legally responsible for its operations. A trustee of a trust can be a company, providing some asset protection.