The Complete Guide to Australian Business Structures
- February 10, 2018
- Posted by: Quarles Business and Financial Strategists
- Category: Business Advice
The Complete Guide To Australian Business Structures
When you are starting up a business one of the most crucial decision that you will need to make is what your business structure will be. We touched on this in our previous post The Ultimate Guide to Starting a New Business, so let’s get into the nitty-gritty of it.
It may at first seem pretty straightforward and easy, but don’t let it fool you. Your business structure can impact multiple things, from how profits and losses are shared to legal obligations and can even have tax implications.
So how do you make sure your business structure is the right one for your needs?
Keep on reading, and by the end of this guide, our business advisors are confident you will have the knowledge required to easily make that decision.
So let’s get into to it.
How To Choose The Right Business Structure In Australia
First things first, what is a business structure and what does it mean for your business?
So a business structure, essentially, is the name for the government defined way your business will operate for legal and taxation purposes. The business structure you choose will impact how the profits of your business can be shared, as well as losses. It also affects who pays what taxes and what you can claim at tax time and can even effect how much paperwork you need to do and who is liable for what in the business.
Once chosen, it is very unlikely to change unless there is a significant change in your businesses operation, like a partner deciding to leave the business or a new partner buying in etc. If you do need to change your business structure it can be done but it is not usually a simple task, so it is essential to get it right the first time.
The most common business structures in Australia are:
- Sole trader
Should I Register As A Sole Trader?
A Sole Trader is commonly chosen by tradespeople, artists and small businesses that are owned and operated by one person, the owner. Sole Traders are the easiest and most straightforward business structures and are also relatively inexpensive to set up.
Be aware that as a Sole Trader you are not covered by workers’ compensation should you injure yourself at work. In this situation, you will likely incur a loss of income if you cannot work and you will still be required to pay any debts for your business.
Because as a Sole Trader you are solely responsible for your business it is often advisable to take out Public Liability along with Illness and Accident Income Protection Insurance. Also if you have employees, you are also required to provide Workers Compensation Insurance.
Take a look at this article to learn a little more about Insurance for Sole Traders
What Is A Partnership? How Does It Work?
Firstly, what is a partnership? A partnership is where between 2 or more people (or entities) go into business together with a view to profit. Partnerships are split into two types: General Partnerships and Limited Partnerships.
General Partnership: This is the most common and straightforward Partnership structure. It means all partners are equally responsible for the business and everyone has unlimited personal liability for business debts & obligations.
Limited Partnership: This means at least one or more partners known as General partners who are responsible for the day to day operations of the business and have unlimited personal liability for business debts and obligations. The remaining partners are known as Limited Partners, Limited Partners contribute capital to the business but they do not have any personal liability for business debts or obligations other than their capital contribution.
Now that we know a bit about the different type of partnerships, why should you choose a partnership over other business structure?
Partnerships are inexpensive and straightforward to set up with minimal reporting requirements. They are a lot like being a sole trader, the main difference being that you are in business with another person. Partnerships allow for taxation planning as to how income is split between members and they are easy to dissolve or resign from.
Some things to consider about deciding on a Partnership is that your Partnership is not a separate legal entity. This means each partner is responsible for the debts and liabilities of the business, which can have asset protection consequences for you personally. Also, there can potentially be disputes over the way profits are shared and control of the business’s direction.
Do You Need To Register As A Company?
The main difference between a Company and a Partnership is that a company is a separate legal entity. This means the Company itself can incur debt, sue and be sued. Setting up a Company is also a lot more complicated and has more significant setup and maintenance costs.
You can choose to be either a private, otherwise known as proprietary, or public Company and when registering the Company you need to have at least one Director. If it is a private Company then you need to also have a company secretary. The Director is responsible for all of the businesses activities.
To become a Company, the entity must be incorporated under the Corporations Act 2001 and be registered with the Australian Securities and Investment Commission (ASIC). Also be aware that the Directors of a Company have legal obligations that specify how duties are performed this is outlined in the Corporations Act 2001.
What Is A Trust And Should You Set One Up?
A Trust is operated by a Trustee on behalf of the Trusts members, known as beneficiaries. The Trustee can be either an individual person or a Company. A Trust requires a formal Trust Deed that outlines how the Trust will operate. The Trust can either be a Discretionary Trust or a Unit Trust.
Discretionary Trusts: The Trustee has the power to decide how the funds of the Trusts will be distributed to each beneficiary.
Unit Trust: The Funds are divided into units, and then the distribution is established based on the number of units held by each member of the Trust.
One of the main things to think about with Trusts is that they are a lot more complicated to set up and operate than a partnership or sole trader, requiring formal yearly administrative tasks. Also, they are more difficult to dissolve or change once established, especially if children are involved as beneficiaries.
Personal Liability and Business Structures
As a Sole Trader, you have unlimited liability for all business debts and obligations. This means if things go wrong with your business, your personal assets will be on the line to pay any outstanding business debts; this includes assets shared with others.
In Partnerships, the default personal liability is unlimited for each partner, and you will also be responsible for any debts your partners incur on behalf of the business whether with or without your knowledge. Also, if a partner cannot afford to pay their share of the debts, you will be held liable for their share.
For companies, the shareholders can limit their liability and usually are not responsible for any of the company’s debts as the company is an independent entity.
If your business structure is a Trust, the Trustee is legally liable for the debts of the Trust and can use the Trust’s assets to pay any debts. However, if the Trust’s assets are insufficient to cover debts the Trustee is liable for the difference.
Learn more about liability when running a business. What Small Business Owners Need To Understand About Liability
7 Factors To Consider When Choosing A Structure For Your Business
1. Why you need a partnership agreement for your business
If you are entering a partnership, it is highly recommended to have a formal partnership agreement prepared that outlines each partners role, authority and financial contribution. It should also include a procedure for resolving disputes and resigning from or dissolving the partnership.
If there is no agreement in place, each partner automatically owns an equal share of every asset. So as you can see if you are entering a Partnership, it is very important to have an agreement in place to establish how the financial and legal obligations of the business are divided.
Take a look at 5 Clauses Every Partnership Agreement Needs to make sure you Partnership Agreement is not missing anything important.
2. How do you register a business name?
If you are a sole trader or partnership, you are not required to register a business name if you operate under your own personal names such as “John Smith” or “John Smith & Bill Smith”. However, if you operate as “Smith Mowing” or “Smith and Sons”, then you would need to register this as a business name.
You can register a business name via the Australian Securities and Investment Commission or call us our experienced business advisors in Perth to help your business needs.
3. Tax Requirements and Tax File Numbers. Apply for a TFN
For sole traders when it comes to taxation it is pretty simple as you can operate using your personal TFN when lodging your tax return and you pay income tax at personal rates. You are also able, in some cases, to offset any losses incurred by the business against other income such as investments or wages.
For partnerships, they are required to have their own TFN, and the Partnership lodges its own independent tax return but doesn’t pay tax on its income. However, each partner pays tax on their share of the partnership’s income. If profits and losses are not distributed equally amongst the partnership ensure you have a Partnership Agreement that outlines this.
As Companies are separate entities, they pay income tax on their profits. Also, this is paid at a company rate, and there is no tax-free threshold for companies, so tax is paid on every dollar earned.
For Trusts a trustee must apply for a TFN and lodge a tax return each year, but the trust is not liable to pay tax. Rather tax is assessed to the trustee or beneficiaries that are entitled to receive income from the trust.
You can register for a TFN via the Australian Taxation Office website.
4. Register for an Australian Business Number (ABN)
ABNs are required for all business structures if you want to avoid having money withheld from payments to you or it your business collects GST. However, a Sole Trader who works as an employee or in connection with earning payment as a company director, office holder or under a labour hire arrangement, are not entitled to an ABN.
Register for an ABN through the Australian Business Register website.
5. Register for Goods and Services Tax (GST)
No matter the business structure, you must register to collect GST when your expected or current turnover reaches $75,000 or more. If you own more than one business, the turnover from each may be combined to reach this threshold.
If you need to register for GST, you can find information about this on the ATO website.
6. Business Bank Accounts – Cash & Cheque Accounts
As a Sole Trader or a Partnership, you are not required to have a separate bank account, so you can use your personal bank account. However, often business owners will still keep a separate bank account for their business to make their finances easier to organise.
Trusts and Companies are required to have separate business bank accounts. Also no matter your business structure you are required to keep financial records for at least five years. Business bank accounts are different to personal bank accounts, and you can usually find information regarding this on each banks website.
Not sure if you can use your personal account or need to open one specifically for your business the expert Business Advisors at Quarles can help.
7. Do You Get Wages and Superannuation?
If you are a Sole Trader or in a Partnership, you are responsible for your own superannuation arrangements because you are not considered an employee of the business & you do not receive wages.
It’s a good idea to ensure that you are still contributing to your own Superannuation, take a look at the option of a Self-Managed Super Fund (SMSF) if you want to stay in control of the money your investing.
As you can see, there is a lot to consider when deciding on your businesses structure in Australia and the choice you make can have a vast arrange of legal and financial implications for your and others in your business.
Ready to start your business in Australia and be successful? Get in touch today to find out how our Business Advisors can get you there.