When you first launch a new business in Australia, one of your first tasks will be to choose a corporate structure.
A firm or organisation’s legal framework and responsibilities are referred to as its business or corporate structure. Your selected business structure will have an impact on the following:
- what the tax obligation is
- continuous reporting obligations
- cost of starting a business
- legal liabilities
- how your firm is run.
- Types of insurance for small businesses
What various business structures can you find in Australia?
Australian company structures can take one of the following forms: sole proprietorship, a partnership, a company, a trust, or some other business structure
As a brand-new small business owner, one of the most crucial decisions you will make is selecting the appropriate business structure.
The benefits and drawbacks of each business form will be emphasised in this guide to business structures to assist you in selecting the one that best suits your unique requirements.
1) Sole proprietorship
The simplest type of business structure is one in which one person owns the entity for which they are legally responsible. This type of organisation is known as a sole trader.
A sole trader typically has complete control over how their business is operated and has the ability to hire staff.
Tax liability: You are personally responsible for paying taxes on any income derived from a sole proprietorship.
If your revenue is greater than $75,000 per year, you must also pay GST and submit a business activity statement.
Benefits of a sole proprietorship
- Simplicity in terms of establishment and maintenance.
- You have total command over the company.
- You keep the entire profit.
- Changes to a company’s structure are simple.
Disadvantages of a sole proprietorship
- Having your own assets (such as your car, home, etc.) at risk since you are personally responsible for any debt the company accrues is a drawback.
- You’ll start paying tax at the highest marginal individual income bracket rather fast if your business generates a respectable amount of revenue.
- Taking a vacation can be challenging.
- Getting financing might be difficult.
- You are in charge of covering your own superannuation, workers’ compensation, and other employee benefits.
2) Partnership
When two or more people jointly own a business, a partnership business structure is created.
Individuals can boost their chances of success by combining their resources and abilities through a partnership firm.
Partners’ income from the business is divided among them, and each partner is responsible for paying their own taxes. If your revenue is greater than $75,000 per year, you must also pay GST and submit a business activity statement.
Benefits of a partnership
- Adding a partnership agreement makes it simple to establish and manage.
- New funds and resources are invested in the company by additional proprietors.
- Can quickly modify business structures.
Disadvantages of a partnership
- Partnership agreements, which can be pricey, are necessary to outline each partner’s rights and obligations.
- Shared management of the company is required.
- Since you and your partners are individually responsible for any debts the partnership accrues, your personal assets (such as your car, home, etc.) are also in jeopardy.
- If your business is profitable, each partner will shortly begin paying taxes at the highest marginal individual income bracket.
- Disagreements between partners may arise and destabilise the company.
3) Company
When a business owner registers with the Australian Securities and Investments Commission (ASIC), they create a company business structure.
After that, the company separates from its first owner as an independent legal entity.
Therefore, the business is able to own assets and make agreements with third parties directly.
Tax liability: Compared to individual tax rates, corporation tax rates apply to businesses. Depending on the requirements you meet, the current business tax rate is either 27.5% or 30%. If your yearly revenue exceeds $75,000, you must also pay GST.
Benefits of a corporate business structure
- Diminished personal liability for any corporate debts and liabilities, and the corporation is treated as a separate legal entity.
- Once your company generates more than a particular amount, company taxes are far more tax efficient because they are much lower than higher marginal tax rates.
- Easier to raise capital
Disadvantages of a corporate business structure
- Directors oversee business operations, and shareholders own the company.
- Increased start-up expenses related to forming the new company.
- More ongoing fees, reporting, and administrative needs for compliance.
- All requirements imposed by the Corporations Act of 2001 must be understood and followed.
- A yearly corporate tax return must be filed with the ATO.
4) Trust
A trust business structure, in its simplest form, is a type of company that retains legal possessions or revenue for the benefit of other people.
The trustee, who is accountable for all debts and liabilities, may be either a person or a business.
Trusts are frequently used to manage, safeguard, and transfer family assets, such as stocks, personal belongings, and the family company, from one generation to the next.
Managing your company through a trust entails having a trustee take ownership of its assets, manage those assets, and distribute the company’s profits to the beneficiaries listed in the trust deed.
Tax obligations: The trustee distributes business profits to the beneficiaries, who subsequently are responsible for paying taxes on that income at their respective marginal individual tax rates.
Benefits of a company trust structure:
- If the trustee is a firm, there will be less personal liability for any debts and liabilities related to the business.
- If all of the profits are distributed, trusts normally don’t pay taxes. This is due to the profits being paid yearly to recipients who are taxed separately.
- Flexibility in allocating profits to recipients. This enables revenue to be dispersed at the discretion of the trustee to beneficiaries who have the lowest marginal tax rates in order to reduce the overall tax paid by beneficiaries.
Disadvantages of a company trust structure:
- Typically, establishing and maintaining a trust structure is more expensive and difficult than doing so for a corporate structure.
- The structure has a brief lifespan (usually 80 years).
- Once established, it is challenging to remove or change.
How do you decide on a business structure?
Although a business structure can often be changed, understanding how to choose one is crucial.
The type of your business will determine which business structure is best for your needs. Despite their apparent advantages, certain options might not be the best fit for you.