Question: What are the tax implications of different business structures?Answer:
Being a sole trader means that there are few legal formalities and obligations because you are in control of all aspects of the business and are also personally liable for it. However, revenue is taxed as personal income, so the more the business earns, the more tax you will have to pay.
In a partnership, you and each of your partners pay tax on the share of the net income you each receive from the business. A partnership business structure needs its own Tax File Number (TFN) that you use when lodging your annual business income tax return, which you would do when applying for an Australian Business Number (ABN).
An incorporated entity or company pays income tax on its profits at the rate of 30% (company tax rate). A company is run by directors and owned by shareholders, and the profits generated belong to the company itself, which operates as its own legal entity and has its own TFN. Some changes to tax laws in 2012 extend the potential liability of Directors to include company tax debts that are not or cannot be met by the company itself.
If the business is being run through a trust, each year all income the trust earns must be shown on a trust tax return, which will also show the amount of income distributed to each beneficiary.