Types of Business Structures in Australia

Starting a Business - Types of Business Structures

When starting a business, you will need to decide which type of business structure is best for your business.

During this process, you should consider your personal circumstances and who will be the key operator of the business.

Making the right decision from the onset is critical because the business structure you choose can impact:

the business registration process
your tax position
the safety of your personal assets and/or
the continuity of the business upon change of ownership.

Without trying to scare you….

It can also influence whether your business succeeds or fails.

Choosing the wrong structure at start-up is a common mistake of business owners. However, this mistake can bring significant consequences for the business owner.

If you need help choosing the right structure for your business, please give us a call on (03) 9762 7344. Our expert staff are here to help you.

You can also check out our range of other business advisory services here.

Related Articles:

Business Structures in Australia – The 4 main types:

Sole Trader
Partnership
Company
Trust

The 4 Types of Business Structures - Sole Trader, Partnership, Company and Trust

Above we have included a simple visual representation of the 4 common business structures.

Now, let’s explore each of them in more detail below.

Business Structure Advantages and Disadvantages:

1. Sole Traders

The Sole Trader structure is suitable for small-scale business operations, particularly those based on the owner’s personal talents.

They can often trade under their own name (e.g. Jenny Green), or can register a business name (Jenny Green’s Bakery).

Sole Traders are liable for taxation on business income which is included their annual Personal Income Tax Return and taxed at marginal rates.

Advantages

Owner has direct control over the business and is entitled to all of its success
Low costs and minimal legal procedures to start up business
As the business grows you can change structure relatively easily
Greater privacy
Easy to disband

Disadvantages

Due to trading alone, Sole Traders bear full responsibility for any liabilities arising out of the business.
This can extend to the owner’s personal assets to pay business debts.
The Sole Trader has to pay the tax on all the profits.

Interest in learning more?

Click the link below to book an appointment with one of our accountants.

2. Partnerships

With a Partnership, the business is typically conducted by 2 or more people, who have the authority as the owners or principals of the business.

The partners share the costs, profits and losses of the business, however, the partnership does require its own Tax File Number.

Developing a partnership agreement is always recommended, to set out the terms and conditions of the Partnership, as well as the duties of each partner.

The Partnership name (if other than the partners’ own names) must be registered under the Business Name Act.

Advantages

Allows a combination of different skills
Can receive some tax advantages
Usually the Partnership is automatically dissolved on the death of one of the partners
The taxable income or loss of the Partnership is distributed, as per the Partnership Agreement. If no agreement exists, it will be divided equally between the parties.

Disadvantages

The liability of the partners is unlimited, and extends to their private property and Partnership assets.
In regards to taxation, a Partnership is required to lodge an Income Tax Return.
Each partner is responsible for the other partner’s share of the business liability.

Types of Business Structures in Australia: Company

3. Companies (Pty ltd)

There are 2 types of companies: Public company and a Private Company.

Private Companies are generally the most popular.

A Public Company can be listed on the Stock Exchange (ASX) or unlisted (not listed on the Stock Exchange.) Shareholders own the company and directors are appointed to run the business.

Like a Partnership, a company must also have its own Tax File Number.

Advantages

Liabilities are limited to the Company’s assets only. It will not extend to the owner’s assets (with some exceptions)
All profits are taxed at one tax rate.

Disadvantages

A company is a more complicated and expensive structure to set up due to compliance costs
There are additional legal and financial reporting obligations
It is not suitable for all business start-ups

Australia Ownership Structures: Trust

4. Trusts (Discretionary & Unit)

This is where the business is transferred to a third party who has legal control to run the business. They also distribute income and/or capital between the relevant beneficiaries.

There are 2 types of Trusts: Discretionary and Unit Trusts.

Like a Company and Partnership, a Trust needs to have its own Tax File Number.

It is also recommended to have a Trust Deed, which sets out the powers of the Trust, and formalises its administration.

Advantages

Can be used to hold property (capital) for Beneficiaries
There is flexibility of income distributions (Discretionary Trust).
Discretionary Trusts offer the greatest level of asset protection.

Disadvantages

Can be difficult to dismantle
Need to lodge a separate Tax Return for the Trust
Beneficiaries pay Personal Income Tax on their income distributions from the Trust.

Related Articles:

Business Structures – Common Q&A’s

So, which ownership structure should you choose?

The best answer: It depends…

Given everyone’s circumstances are unique, it’s always best to seek advice from an accountant before making any decisions relating to business structures.

As your accountants, we can ensure that your business structure helps to:

Maximise personal asset protection
Minimise tax exposure
Comply with all legal requirements, and/or
Allow for the admission of new partners or investors into the business (if relevant)
Have future entitlement to Discount Capital Gains Tax Concession (if relevant)

Our team of senior accountants are experts in Business Structuring.

We can help to explain the different types of business structures in Australia, in simple laymen’s terms, and identify which structure will be best for you (& your business).

If you’d like to chat with one of accountants, please book an appointment via the link below.

Alternatively, you can call us on (03) 9762 7344.

We hope you have found this article helpful in explaining the different types of business structures in Australia.