Whether or not you are just starting a new business or have been in business for a while, it is important to understand the business structure under which your business operates. In general there are four structures: company, sole trader, partnership and trusts. Each structure has its own set of “rules” which greatly affect how you should operate your business. The various business structures are explained below.
Structure Types Explained
Company
- owned by shareholderscontrolled by directors;
- personal assets are protected but directors can be liable for their actions and in some cases, company debts.
- has it’s own TFN and ABN;
- the income earned by the company, belongs to the company;
- a tax return is lodged for the company; tax is paid on company profits at the current rate;
- directors are usually made employee’s of the company and as such receive a wage from the company.
- incorporated companies are regulated by ASIC (Aust Securities & Investment Commission);
- there are additional reporting requirements for companies and as such, set up costs and on-going fees are quite costly.
Sole Trader
- simplest structure and least costly to setup;
- you trade on your own and control & manage the business and are legally responsible for everything in your business
- personal assets are not protected;
- your individual TFN applies to your business;
- you should apply for an ABN and GST if applicable;
- the business income is treated as your own income and is reported on your individual tax return along with any other income you received; sole traders are eligible for the tax-free threshold;
- sole traders can take drawings from their business but these aren’t treated as wages and as such are not tax deductible;
- you are responsible for paying your own super
Partnership
- more than 1 person carry on the business and receive income jointly;
- cheap to set up like the sole trader;
- partners share control and management of the business;
- income and losses are shared as are the debts;
- it has it’s own TFN, ABN and can reg for GST;
- income tax is not paid by the partnership, rather, each partner will pay tax on his/her share of the income;
- even though the partnership doesn’t pay tax itself, a tax return must be lodged for the partnership;
- partners can take drawings from the partnership but these are not wages and are not tax deductible;
- you are responsible for your own super because you aren’t an employee of the partnership
Trust
- a trustee holds property or assets (business assets) for the benefit of others (beneficiaries);
- can be expensive to set up and maintain;
- the trustee is legally responsible for the business operations;
- a trust has it’s own TFN, ABN and can reg for GST;
- not all trusts pay tax – depends on type of trust, the wording of the trust deed and whether or not all net trust income is distributed to beneficiaries (in that case no tax is payable);
- Where the whole of the net trust income is distributed to adult resident beneficiaries, the trust is not liable to pay tax;
- there are several variations on how trusts are set up etc., which impact whether or not tax is paid and by who – seek advice from your tax professional to find out how you may be affected.
Please note, this information is very general in nature. We advise that you speak with your accounting professional about your business structure and any other aspects of your individual financial situation before making important decisions.
