At BOA & Co., we pride ourselves in our ability to give you the best financial advice for your business, so that you can have the ease of mind when opening a new business venture, or when you are planning on expanding your business to the next level. Therefore, this article is dedicated to educate you on the different business structures in Australia and to see which one is most suitable for you.
The 4 main business structures in Australia are the Sole Trader, Partnership, Company (Private/ Public), and Trust (Discretionary Trust/ Unit Trust).
With each having their own advantages and disadvantages, and distinct characteristics, we will highlight the key features and issues of each to give you an overall understanding of each structure.
But first, we believe that for each business it is crucial to have certain key elements, as follows.
- You should maximise your personal asset protection
- Minimise your tax exposure
- Comply with all legal requirements
- Allow new partners and investors to enter
- Have future access to Discount Capital Gains Tax Concession
Typically in Australia, Sole Traders are small scale business operated by its owners directly, usually by family members and close friends.
- Can have direct control over the business and all its success
- Low costs and minimal legal requirements to start up
- Easy to change the business structure
- Greater privacy
- Easy to disband
- Owners have to bear full responsibility for liabilities (unlimited liabilities)
- Owner’s personal assets may be used to pay business debts
- Pay tax for all profits (Business income are taxable, included in their ‘annual personal income tax return’ and taxed at marginal rates)
Partnerships are formed by 2 or more business ventures. Once the partnership is formed, both sides become Owners or Principles of the business. In a Partnership, it is required to have a TFN of its own, since it is considered a new entity. They also bear profits and losses together, as well as set terms and conditions for the duties each side will have to follow. Under the Business Name Act, the name of the partnership must also be registered.
- Allows combination of different skills from each side
- Partnerships are able to receive tax advantages
- Usually, partnerships dissolve if one partner passes away
- Taxable income or loss of Partnership is shared, according to Partnership Agreement; if not, is still divided between parties
- Unlimited liability spread between Partners, their property and assets
- Required to lodge Income Tax Return
- Each Partner is responsible for other’s share of business liability
Companies can be divided into private and public companies, are run by directors and owned by shareholders. They can also be listed and unlisted on the ASX (Australian Stock Exchange)
Similar to a Partnership, companies are required to have their own TFN, the business is operated by directors and owned by shareholders.
- Liabilities are limited to the Company’s assets, will not extend to the owner’s assets (within a limit)
- All profits are taxed at a fixed rate
- Company can distribute franked divided to their shareholder without having them to pay tax again (franking credit)
- There is setup cost and annual reporting due to ATO and AISC compliance requirements
- Additional legal and financial reporting obligations
Trust (discretionary and unit trusts)
There are two types of Trusts- discretionary and unit trusts. Trusts are required to have their own TFN, and to have a Trust Deed. The purpose of a Trust Deed is to set out the powers of the Trust, making it legally binding for the parties involved and create asset protection.
- Can hold properties for beneficiaries
- Flexible in income distribution (discretionary trust only)
- Discretionary Trust offer the greatest level of asset protection
- Can be difficult to dismantle
- Need to lodge a separate Tax Return for the Trust
- Beneficiaries pay Personal Income Tax on their income from the Trust
Should you have any questions about setting up your own business, feel free to contact us.