• There are four common business structures to choose from; sole trader, partnership, company or trust.
  • The structure you choose will significantly affect your business’ legal and operational risk, its asset protection, tax obligations, legal costs and clientele.
  • You can change structures to accommodate the growth of your business, but changing legal structures can often be very complex. It is important to think carefully early on about which structure is the right one for your business and best reflects your goals for the future.

Types of Different Business Structures

Sole Trader is the simplest of the available business structures. As a sole trader, the business is managed and operated under your name. It is cheap and easy to set up, but it is not very flexible and will not accommodate a growing business. The sole trader structure is most suitable for contractors, tradies, entertainers, home businesses, online stores, websites and most small businesses. The majority of small business owners in Australia are sole traders.

A partnership is an association of two or more people who carry on business as partners. If you are entering into business with a partner, then a partnership structure works best. It is important to consider who you enter into a partnership with, as all partners are equally liable for the actions of the other partners.

A company structure is ideal where you are looking to grow and scale your business. Revenue is earned and taxed under the company name, and you can take on shareholders to raise capital.

A trust structure can be used to run a company. A corporate trustee distributes income and capital to the beneficiaries of the trust, by the trust deed.

Benefits of Different Business Structures

When starting up a business, one of the first things you should consider is which structure is going to have the best long-term benefits and reflects your goals for growth in the future. You will need to think carefully about the type of business you are going to run, how much control you wish to have over the decision-making process and management of the business, as well as thinking about the potential liability you may have and any valuable assets you want to protect.

Each structure is set up in a different way, with varying upfront and ongoing costs. For example, as a sole trader, you are the business, so all you need is an Australian Business Number (ABN) which you can obtain at no cost, and pay a one-time registration fee of around $100. On the other hand, registering a company with ASIC costs $497, and the annual renewal fee costs $243.

You will also need a lawyer to help you with the more complex legal structures. A LegalVision business lawyer can help incorporate your company, draft up relevant documents such as a partnership agreement if you’re going into a partnership, or a trust deed if you’re choosing to run the company through a trust.

Key Issues

  • Are the costs of setting up and maintaining each structure realistic for your business’ type, size and the potential for growth?
  • What are the tax advantages/disadvantages of each structure?
  • How can different structures help with asset protection and personal liability?
  • What documents you will need to set up each structure.

Choosing the Right Business Structure

Above all, you must assess your needs and plans for the future, seeking advice from a business lawyer where you are unsure. To help you with your important decision, consider the advantages and disadvantages that come with each structure.

Companies are regulated by the Corporations Act. This sets out the statutory obligations that a company must abide by, including appointing a board of directors and implementing a company constitution or using the replaceable rules in the Act. Sole traders, however, do not have any legislation that governs its structure and operation.

Liability is a major consideration when deciding on a business structure. A company structure limits your personal liability while being a sole trader does not. Sole traders are required to secure loans with personal assets such as property, or to pay off debts in the event of insolvency (bankruptcy). Directors of a company have protection from creditors if the company goes into debt, unless they continue to operate the business while it is insolvent.

Raising capital and generating investments are more difficult as a sole trader, but very easy in a partnership or as a company. It’s much easier to attract investors and raise capital by issuing shares and is important to consider if you are aiming to grow your business in this way. To bring on shareholders, you will need a shareholders agreement.

The way that different business structures are taxed will also factor into your decision. The profits made by sole trader businesses are considered personal income and are taxed as such. Companies pay 30% tax on their income but are required to keep financial records up to date and lodge annual tax returns and reports to ASIC. Using a trust structure also allows you to minimise tax, by streaming distributions to beneficiaries on lower tax rates.

Business Structure Sole Trader Partnership Company Trust
Expensive to register No No Yes Yes
Difficult to set up No No Yes Yes
Complete control over decision-making Yes No No No
Limited Liability No No Yes Yes
Easy to raise capital No Yes Yes Yes
Easy to dissolve or sell Yes Yes Yes No
Tax benefits No Yes Yes Yes
Can I retain all profits made? Yes No No No
Can I change structures easily? Yes No No No

Frequently Asked Questions about Business Structures

Q: Is it possible to change business structures?
A: Yes it is. It is standard to change business structures from sole trader to the company, or partnership. Besides the relevant legal documents, you’ll need to apply for a new ABN and will need to register your new business details with the Australian Business Register.

Q: What about franchising?
A: If you are wanting to run your own business but do not want the pressures of building it up from the bottom, franchising allows you to operate a particular kind of business under their brand name and business model, which has been established previously by the franchisor. This method certainly reduces the risk of failure but gives you much less control over the business.

Alternatively if you have an existing business, franchising is a great way to expand your business, but it is a complex and expensive process and is heavily regulated by legislation.

Q: Can I run a business through a family trust?
A: Yes, a family trust is similar to a discretionary trust and, therefore, can operate a business. This can be a good way to distribute income to different family members, minimise overall tax deductions, or to pass the business from generation to generation.

Q: What is a unit trust? Can I run a business through one?
A: A unit trust differs from a discretionary trust in the way that income or assets are distributed to beneficiaries. In a discretionary trust, the trustee has discretion as to how income is distributed, while in a unit trust the beneficiaries are entitled to a fixed sum based on how many ‘units’ they are allocated in the trust deed.

Q: What if I want to sell my business down the track?
A: This won’t be difficult, regardless of structure, but it is not common for sole traders to sell their business.

How can LegalVision help me?

LegalVision provides businesses and individuals with tailored online legal advice, including helping you find the right structure for your business, and preparing the relevant paperwork to get you started. For legal advice, contact LegalVision on 1300 544 755.

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