Undoubtedly, starting a new business is pretty exciting, but it comes with tons of responsibilities. The very first step you need to take is deciding the legal structure of the business.
Not only for a new business, but being aware of the legal structures is necessary for everyone who runs a business. Since there might come a time when the current structure of your business is not relevant or appropriate, you will have to adapt to the changes as per the requirement.
In Australia, there are mainly 4 business structures. While choosing a structure, you have to look at some important factors, such as asset protection, start-up expense and much more.
What Are The 4 Types of Business Structures?
You can choose any business structure per your specific requirements when it comes to operating a business.
The first and the simplest legal structure of a business is Sole Trader. It is usually the ideal choice for a small business. Usually, sole traders carry their business under the name of the owner. They can also choose to register their business name.
Not only is the setup process quite simple, but the costs are also low. Along with this, you get complete control over your business, which catches the interest of numerous new businesses.
Here are the features of this business structure.
- Low-cost and easy setup process;
- Minimal legal requirements for establishment;
- Straightforward to change the business structure once it starts growing;
- As a Sole Trader, you are entirely liable for all the debts incurred;
- Taxes are paid on the net profit made by all the business activities, and in the personal tax returns, the income from your business is included;
- Direct control of the owner;
- As a Sole Trader, you can never be an employee of your own business. Thus, there will be no minimum superannuation guarantee payments. Nonetheless, you can make personal concessional contributions to your nominated super fund till the annual limit.
If two or more parties manage and run a business together with a formal agreement, it is a partnership business structure. Since there is more than one party, all the rewards and the risks are shared.
Both ABN (Australian Business Number) and TFN (Tax File Number) are mandatory for this structure. Also, developing a partnership agreement to lay out the terms and conditions is required for security purposes.
The key features of partnership business structure:
- Profits and losses are shared among the partners;
- If one of the partners dies, the partnership dissolves on its own;
- For the taxable income and loss, the distribution is according to the partnership agreement;
- The liability is unlimited;
- Just like a Sole Trader, you cannot be an employee.
Companies are legal entities formed by one or more people to run the business. There are two types of companies, namely public and private. Public companies have too many regulations, so private companies are preferred.
Key features of a company:
- Separation of company’s and shareholder’s assets and liabilities;
- Must lodge a tax return;
- Tax rates are flat, not marginal;
- Severe penalties for breaching any regulations
- Establishment costs and compliance costs make the process expensive.
Trust is the right choice if you are looking for a structure that can provide you with tax benefits and optimum flexibility. A trustee (an individual or a company) manages the business on behalf of beneficiaries.
The Key features are:
- Between individual trustees and corporate trustees, the latter offers high asset protection;
- There are two most common types: fixed trusts and discretionary trusts;
- In a fixed trust, beneficiaries get a fixed percentile of the income as per their ownership;
- In discretionary trusts, more flexibility is present for the distribution of income;
- Filling an annual tax return is a must;
- Beneficiaries have to involve their income from the trust in the personal tax return, and the tax must be paid at the marginal rate.
In case you are finding it hard to manage your taxes with regard to your business structure, reach out to Clear Tax Accountants.
Disclaimer: The information on this website is for general purposes only and should not be relied upon for making legal or other decisions. The advice provided in this article is general in nature and is not subject to the personal financial situation and needs of any individual. Clear Tax tries to keep the information accurate and up-to-date; however, you should bear in mind with changing circumstances, the accuracy and reliability of the information will not necessarily remain the same. The information is by no means a substitute for financial advice.