How to Choose the Right Business Structure
When starting a business in Australia, it’s important to choose the right business structure as it will be a key factor in the growth and success of your business. The business structure that you choose will depend on the type and size of your business, your business goals, as well as your personal circumstances.
As experienced business accountants in Melbourne, we are here to guide you through the business structure options and determine the appropriate structure for your personal and business circumstances. The right business structure will allow for effective risk mitigation and tax minimisation and asset protection.
We can advise you on the pros and cons of these business structures:
- Sole trader
- Discretionary Trust
- Family Trust
- Unit Trust
Book your appointment with our experienced business accountants in Melton on (03) 9746 6479 to determine the right business structure for your needs.
Before consulting with a business accountant about your business structure setup, you should review the following information about the various types of business structures and their relative pros and cons.
Sole Trader, Partnership, Trust or Company. What is the right business structure?
In Australia, there are four main business structures to choose from. Each have their advantages and disadvantages which you will assess based on your needs and personal circumstances. Before deciding on a business structure for your business, we recommend that you speak to us first for personalised business and tax advice.
Starting your business as a sole trader is the simplest and most inexpensive business structure. It is inexpensive to set up and is usually the least expensive structure in terms of legal and professional costs.
When you start your business as a sole trader, you are actually starting your business under your own legal name and tax file number. You will need to register an ABN number to your tax file number. Registering a business name is optional. If you choose not to register a business name, your legal trading name is simply your personal name.
In terms of tax returns for sole traders, your business income and expenses are recorded as part of your personal tax return. A sole trader prepares and lodges only one tax return. There is a common misconception that a sole trader tax return is different and separate to an individual tax return.
A sole trader tax return is not a separate tax return and cannot be lodged as a separate tax return document. Sole trader business income and expenses are simply reported in a different section within your personal tax return.
For more information about a sole trader business structure and sole trader tax implications, please read our blog post here or contact us to set up your sole trader business structure.
A partnership allows you to start a business with two or more people. What’s interesting about a partnership is that it will have its own ABN and tax file number for tax purposes, but it’s not legally separate from the partners of the business. This means that each partner within the partnership is personally liable for any debts incurred by the other partners on behalf of the business.
A partnership business structure is relatively simpler and less expensive to set up compared with a company. However the exposure to unlimited liability makes the partnership structure less attractive than a company. It is advisable to have a legal partnership agreement in place.
A partnership will need to lodge a partnership tax return each financial year. Although the partnership lodges a partnership tax return, it does not pay tax on its profits. It is the partners of the partnership who will pay tax on the profits of the partnership.
For more information about a partnership business structure and partnership tax implications, please read our blog post here or contact us to set up your partnership business structure.
A company is a ‘stand-alone’ legal entity and is separate to the people who run it. This means a company has its own legal identity, including its own ACN (Australian Company Number), ABN and tax file number for income tax purposes.
A company provides a level of asset protection and protection from liability. This means that the company’s owners (the shareholders) can limit their personal liability their personal assets are generally not exposed to company debts. Only the company’s assets are exposed in the event of litigation or debt. The responsibility of company directors and company officeholders are quite onerous and it’s important that you understand your obligations which are outlined in the Corporations Act 2001.
A company must lodge its own company tax return. The tax obligations of a company are quite different to those of a sole trader, partnership and trust. A company pays tax on its profit at the company tax rate (currently 27.5%). A company does not benefit from a tax-free threshold and is not eligible for the 50% capital gains discount.
The accounting and bookkeeping for a company is generally more stringent compared with other business structures. Companies are more expensive to maintain from an administrative and compliance perspective. However, the benefits of a company structure outweigh any perceived disadvantages.
For more information about a company business structure and company tax implications, please read our blog post here or contact us to set up a company.
Trust – Discretionary Trust, Family Trust, Unit Trust
A trust is a structure that you have likely heard of. It’s sometimes described as a ‘family trust’. In fact there are two main types of trusts; a discretionary trust and a unit trust.
A trust is a type of business structure that appoints a trustee to operate the business on behalf of its members. A trustee can be a person or company and the members of the trust are called the beneficiaries of the trust. Don’t be put off by the unique jargon associated with trusts. They are a very effective structure for tax and asset protection purposes.
Trusts offer a lot of flexibility for tax purposes. The key advantage of using a trust as a business structure is the ability to decide who will benefit from the income of the trust. This means you can ‘split’ the income in the most tax effective way allowed by the trust deed and the tax law.
Trusts have their own ABN and tax file number and must lodge a trust tax return each year. Generally speaking, trusts do not pay tax. Instead, a trust will distribute profits to its beneficiaries, and the beneficiaries will pay tax on their share of the profits at their own marginal rate of tax.
Similar to a company, a trust is a complex business structure and its administration and compliance costs are more expensive than a sole trader or partnership. However, the benefits of using a trust as a business structure do outweigh the costs.
For more information about a trust business structure and trust tax implications, please read our blog post here or contact us to set up a trust.
Can I change my business structure at any time?
Yes you can change your business structure at any stage throughout your business lifecycle, however changing business structure can be complex.
If you find that you need to change your business structure to suit the changing needs of your business or your personal circumstances, we recommend that you speak to us first. We are business accountants in Melton, Melbourne who can guide you through the process of changing business structure.
We can help you understand the differences between the business structures suitable to your business. We will also detail the key tax implications of a change in business structure and ongoing administration and compliance obligations.
Is my current business structure suitable to my needs?
In additional to providing advice on proposed business structures, we can review your existing business structures. We recommend business owners and investors to regularly review their current business structures.
A structure that was once suitable for your business may not be the most effective structure for tax planning or asset protection purposes.
A business structure review can be done for you as a single service. A business structure review is also part of our Tax Planning service and is a standard service in our higher-level Fixed-fee Business Accounting packages which you can explore here.