Choosing the right business structure for your business

When choosing the right business structure, it’s essential to consider your business goals, tax implications, risk tolerance, and future growth plans. Here’s a breakdown of the four common structures in Australia:

Sole Trader

• Ideal For: Individuals starting a small business or freelancing.
• Features:
  • Simple and inexpensive to set up.
  • Full control over decision-making and profits.
  • Easier to manage taxes; income is reported on your personal tax return.
• Risks:
  • You’re personally liable for all business debts and legal issues.
  • No separation between personal and business assets.
• Tax Implications:
  • Taxed at personal income tax rates.
  • May be eligible for tax deductions related to business expenses.

Partnership

• Ideal For: Businesses run by two or more people who share skills or resources.
• Features:
  • Relatively simple and cost-effective to establish.
  • Partners share profits and losses according to the partnership agreement.
  • Each partner is taxed on their share of the business income.
• Risks:
  • Unlimited personal liability for business debts and obligations, including those caused by other partners.
  • Disagreements between partners can complicate decision-making.
• Tax Implications:
  • Partnership income is distributed to partners and taxed at their individual rates.
  • The partnership itself does not pay tax but must lodge a partnership tax return.

Company

• Ideal For: Businesses seeking limited liability and scalability.
• Features:
  • Legally separate from its owners (shareholders), protecting personal assets.
  • More professional image and easier to raise capital.
  • Directors manage the business and must comply with specific legal obligations.
• Risks:
  • Higher costs and more regulatory requirements.
  • Annual reporting to ASIC and preparation of financial statements.
• Tax Implications:
  • Taxed at a flat company tax rate (e.g., 25% for base rate entities in Australia).
  • Shareholders are taxed on dividends received, with franking credits offsetting tax paid by the company.

Trust

• Ideal For: Those prioritising asset protection or estate/tax planning.
• Features:
  • The trustee manages the trust’s assets for the benefit of beneficiaries.
  • Offers flexibility in distributing income and capital gains.
  • Can provide significant tax planning advantages.
• Risks:
  • Expensive and complex to set up and administer.
  • Trustees have legal obligations to act in the beneficiaries’ best interests.
• Tax Implications:
  • The trust itself typically does not pay tax; beneficiaries are taxed on distributions.
  • Undistributed income may be taxed at the highest marginal rate.

How to Decide

1. Simplicity and Low Cost: Consider a sole trader or partnership.
2. Liability Protection: A company or trust may be more appropriate.
3. Growth and Investment: Companies are often better for scaling.
4. Asset and Tax Planning: Trusts offer more flexibility but require expert advice.

For tailored advice, consult our accountants on (03)9848 5933 or online to ensure your structure aligns with your personal circumstances and long-term business goals.

Source: Xero