How to Choose the Right Business Structure

Starting a new business is a challenging endeavour. One of the first critical decisions you’ll face is selecting the appropriate business structure. However, this decision isn’t limited to new business owners; existing businesses may need to reconsider their structure. Choosing the right business structure involves assessing various factors, including startup costs and long-term asset protection. It’s essential to remember that business structures can, sometimes, be modified as needed to align with your business’s evolving needs.

This article provides an in-depth look at the four most common business structures in Australia.

Contents

1. The Four Most Common Business Structures in Australia
2. Comparing Australian Business Structures
3. The Importance of Business Structuring
4. How to Establish Your Business Structure
5. Seeking Expert Guidance on Business Structure

The Four Most Common Business Structures in Australia

Australia’s diverse business landscape means that the most suitable business structure for your venture depends on your unique circumstances. Here are the four most common business structures in Australia:

1. Sole Trader (Individual): The Sole Trader structure is ideal for small business owners, especially when the business centres around the owner’s personal skills and talents. Sole Traders often operate under their own name or register a business name. The simplicity of setup and low costs make this structure appealing to many new businesses.

Key Features of the Sole Trader Business Structure:

• Simple and cost-effective setup.
• Sole Traders are personally liable for all business debts incured.
• Tax is paid on net profit as part of personal tax returns.
• Sole Traders don’t receive minimum superannuation guarantee payments but can make personal concessional contributions to their super fund.

2. Partnerships:  A Partnership is an arrangement between two or more parties who operate a business. In this structure, risks and rewards are shared among the partners, and it’s essential to develop a Partnership Agreement set out the terms and conditions.

Key Features of the Partnership Business Structure:

• Combines different skills and resources.
• Profits and losses are shared among partners.
• The Partnership lodges an Income Tax Return, but it doesn’t pay tax.
• Taxable income or loss is distributed to partners according to the agreement or equally.
• Each Partner has unlimited liability for the all debts and liabilities of the Partnership.
• Partners don’t receive a wage but can make personal concessional super contributions.

3. Companies: A Company is a legal entity formed by individuals to operate a business. In Australia, there are two types: Public and Private. Private companies are more common due to fewer regulatory requirements. Directors manage the company, and shareholders own it.

Key Features of the Company Business Structure:

• Separate legal entity, with company assets and liabilities distinct from directors and shareholders.
• Profits remain in the company until distributed to shareholders.
• Companies must lodge an annual tax return and pay tax at a flat rate.
• Stringent regulations and potential penalties for non-compliance.
• Higher setup and maintenance costs.

4. Trusts: Trusts offer flexibility and tax benefits. A Trustee manages business assets on behalf of beneficiaries. The Trust must have its Tax File Number (TFN) and lodge its tax return. Beneficiaries include their share of income in personal tax returns.

Key Features of the Trust Business Structure:

• Trustee manages assets for beneficiaries, who can be individuals or a company.
• Corporate Trustees provide higher asset protection.
• Fixed Trusts distribute a fixed percentage of income, while Discretionary Trusts offer flexibility.
• Trusts must file annual tax returns.
• Beneficiaries pay tax on their share of income.
• Higher setup and compliance costs.

Why is Business Structuring Essential?

Choosing the right business structure is a critical decision that can impact several aspects of your business:

1. Tax Implications: Each structure has distinct tax implications that can affect the amount of tax you pay. For example, Companies are taxed at a fixed rate, while Sole Traders pay tax at personal rates, which can be higher.
2. Asset Protection: The right structure can help protect your personal assets from business liabilities, which is crucial in case of legal disputes or insolvency.
3. Cost Considerations: Different structures come with varying setup and maintenance costs, impacting your overall expenses.
4. Industry Compliance: Your industry may have specific requirements for business structures, which must be considered for compliance.

Ultimately, selecting the right structure aligns your business with its goals, saves money, and reduces potential issues in the long run.

How to Establish Your Business Structure

The process of setting up your business structure varies depending on your choice. Here are some key steps to follow:

For Sole Traders:

• Apply for an ABN (if you have a TFN).
• Determine if GST registration is necessary.
• Optionally, register a business name.
• Obtain necessary insurance.
• Prepare employee contracts if hiring.
• Register for PAYG Withholding and Single Touch Payroll if employing staff.
• Use online accounting software for administrative ease.
• Maintain separate bank accounts for both business and personal finances.

For Partnerships/Companies/Trusts:

• Choose a name for your entity.
• Apply for an ABN and TFN.
• Determine GST registration requirements.
• Optionally, register a business name.
• Obtain necessary insurance.
• Prepare employee contracts if hiring.
• Register for PAYG Withholding and Single Touch Payroll if employing staff.
• Use online accounting software for compliance.
• Maintain separate bank accounts.
• Acquire necessary legal documents (e.g., partnership agreement, company constitution, trust deed).

Note that Partnership, Company, or Trust structures are complex and may require additional processes. Consult with an accountant or business advisor, and consider legal advice if needed.

Seeking Expert Guidance on Business Structure

Choosing the right business structure is a very important decision with lasting implications. Seek input from stakeholders, including partners, family members, business owners, solicitors, and business advisors. Engage experienced professionals to guide you through this process. Accountants 2 Business helps businesses across Australia and can provide valuable assistance in determining the optimal business structure for your specific needs. Make an informed choice to secure a prosperous future for your business.