When starting or restructuring a business, choosing the right structure is essential. In Australia, the most common business structures are sole trader, partnership, company, and trust. Each has its own legal, financial, and tax implications. This guide explains the differences among these structures, with simple examples.

Sole Trader

A sole trader is the simplest and most cost-effective business structure. The business is owned and operated by one individual who is legally responsible for all aspects of the business.

Features:

• Ownership: Owned by one person.
• Liability: Unlimited liability; personal assets may be at risk.
• Taxation: Business income is reported as personal income on the individual’s tax return.
• Control: Full control over decisions.
• Setup Cost: Low.

Example:

John operates a photography business where he personally handles all the operations, from taking photos, editing them to managing customer bookings and payments. John is solely responsible for all profits, debts, and liabilities.

Advantages:

• Simple and affordable to establish.
• Full control over business decisions.
• Minimal reporting requirements.

Disadvantages:

• Unlimited personal liability for debts.
• Limited access to capital.
• Reliance on one person’s skills and capacity.

Partnership

A partnership involves two or more people (up to 20 in most cases) who share ownership, profits, and responsibilities of the business.

Features:

• Ownership: Shared among partners.
• Liability: Unlimited liability for general partnerships; limited partnerships offer limited liability for some partners.
• Taxation: Income is distributed to partners and taxed at their individual rates.
• Control: Shared decision making among partners.
• Setup Cost: Moderate.

Example:

Sarah and Emily jointly run a café in the Partnership structure. Sarah manages the kitchen and menu, while Emily handles customer service and financial management. Both share profits and are jointly liable for debts incurred by the business.

Advantages:

• Shared responsibilities and skills.
• Increased access to capital.
• Relatively simple to establish.

Disadvantages:

• Unlimited liability for general partners.
• Potential conflicts among partners.
• Joint liability for actions of other partners.
• Difficult to add or remove partners.

Company

A company is a separate legal entity from its owners (shareholders). It can incur debts, sue, and be sued in its own name.

Features:

• Ownership: A separate legal entity, owned by shareholders.
• Liability: Limited to the value of shares held.
• Taxation: Pays a flat corporate tax rate (25%-30%, depending on turnover).
• Control: Directors manage the company on behalf of shareholders.
• Setup Cost: Higher than sole traders and partnerships.

Example:

Tech Innovators Pty Ltd is a software development company owned by three shareholders. The company has a board of directors who make strategic decisions, while the shareholders receive dividends from profits.

Advantages:

• Asset protection.
• Limited liability for shareholders.
• Easier to raise capital through share issuance.
• Perpetual succession (business continues if ownership changes).

Disadvantages:

• Complex setup and compliance requirements.
• More expensive to establish and maintain.
• Directors can be personally liable in certain circumstances.

Trust

A trust is an arrangement where a trustee holds and manages assets on behalf of beneficiaries.

Features:

• Ownership: Trust is not a separate legal entity, it is a relationship between the Trustee and the beneficiaries, which is bound by the trust deed. Trustee legally owns assets and manages them for beneficiaries.
• Liability: Depends on the type of trust; trustees can be personally liable.
• Taxation: Income is distributed to beneficiaries and taxed at their marginal tax rates.
• Control: Trustee has significant control, governed by a trust deed.
• Setup Cost: Higher than sole traders and partnerships.

Example:

The Smith Family Trust is established to manage rental properties. The trustee ensures rental income is distributed to family members (beneficiaries) according to the trust deed.

Advantages:

• Asset protection.
• Flexible income distribution.
• A careful structure can provide tax benefits in certain circumstances.

Disadvantages:

• Complex to set up and administer.
• High setup and ongoing costs.
• Trustees have fiduciary responsibilities and potential liabilities.

Conclusion:

Choosing the right structure depends on factors such as liability tolerance, tax implications, management preferences, and future growth plans.

For personalised advice, consult with us for a tailored advise.