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Choosing a business structure

6-minute read

Choosing the right business structure is an important decision when setting up a new enterprise and you’ll need to consider the liability and tax implications of each business type. This article has been written to help you decide the business structure for your specific needs.

Key take-outs
  • There are four main types of business structure.
  • Each structure has pros and cons.
  • Responsibility, liability, and tax implications vary between structures.
  • If unsure, ask your accountant or financial adviser.

What type of business should I be?

Much will depend on how many people will be involved, whether you’ll need to hire others, the nature of the business, how much income you think it’s going to bring in, and how you plan to grow in the future.
 

The costs and risks of each legal structure are quite different. You should think about issues such as your time, money and the paperwork required when deciding which business structure to choose. This structure will also determine what registrations and applications are required.

What acronyms will I come across in this article?

  • TFN – tax file number
  • ABN – Australian Business Number
  • ACN – Australian Company Number
  • ASIC - Australian Securities & Investment Commission
  • ATO – Australian Taxation Office

What are the different types of business structure?

There are four main types of business structure. Before choosing which is right for you, review the differences between each and consider their pros and cons.
 

1. Sole Trader

As a sole trader, you are the sole owner of your business and have full control over it. The business can trade under your legal name (such as Oliver Smith) or a business name (such as Oliver Smith Plumbing). If you choose a business name you must register it with ASIC.
 

The income you earn from the business is treated as your own, so you will pay tax at your individual tax rate. As a sole trader you can employ others to help you, but this will come with obligations such as providing worker’s compensation insurance and paying super.
 

As a sole trader you don’t have to have a business bank account1, but it’s a good idea to get one to keep your business dealings separate from your personal finances.
 

Pros Cons
  • Easy and lower cost to set up
  • You have 100% control and keep all of the profit
  • Fewer compliance and legal requirements
  • You have unlimited personal liability
  • The business has no backup if you fall ill
  • It can be more difficult to raise finance

2. Partnership

If you are considering setting up a partnership, your business will be owned by two or more partners, with income received jointly. In creating the partnership you’ll need to draw up an agreement or contract covering areas such as salaries, drawings, profit share, loan agreements, termination clauses, if new partners can be admitted, how books are kept and how disputes are settled and losses handled.
 

Your partnership will need its own ABN and TFN, plus a bank account that’s separate from any of the partners’ personal accounts. Each partner pays tax on their share of the net partnership income.
 

Pros Cons
  • Partners share risk and responsibility
  • More partners make it easier to raise finance
  • Broader skill set and management base
  • Each partner is personally liable for debt
  • Authority is divided amongst partners
  • There are limits on partnership size

3. Trust

A trust is an entity that holds property or income for the benefit of others. If you operate your business as a trust, the trustee (which can be a company, providing some asset protection) is legally responsible for its operations.

Trusts can be complex to set up and administer, so you should check with your solicitor on whether it suits your individual circumstances. If you go ahead, you will need an ABN and a TFN in the name of the trust.
 

Pros Cons
  • Limited liability is possible
  • More private than a company
  • Greater flexibility in income distribution
  • More costly to set up and run
  • More compliance and legal requirements
  • Powers are restricted to the trust deed

4. Company

The words ‘Pty Ltd’ after a business name, indicate that it’s a registered legal entity trading in its own right. Your company will have shareholders (who invested when the business first started, or along the way) and directors (people appointed by the company to run it).
 

Profits are either shared out among the shareholders in the form of dividends or reinvested in the company. Directors can be asked to give personal guarantees to cover any debts incurred.
 

You’ll need to register the company with ASIC, which will then issue you with an ACN. Your company will need its own TFN to lodge its annual income tax return, and may need its own ABN for trading purposes.
 

Pros Cons
  • Financial liability is limited to the company assets
  • Easier to raise finance for expansion
  • Ownership can be transferred easily
  • Must publicly disclose key information
  • Extra regulations around record keeping
  • Owners can’t offset losses against other income

Do I need an ABN or an ACN?

Once you have decided on a business structure, you’ll need to think about the registrations and applications required. Here’s an overview plus a reminder of what those acronyms stand for.
 

If you are in business, you should apply for an Australian Business Number (ABN). It is a unique number assigned by the Australian Tax Office (ATO) to all business types including sole trader and partnership.
 

If you’re required to be registered for GST (see below), it is compulsory to have an ABN – but it’s not mandatory for solo business owners earning less than $75,000 per year. However, your business may need an ABN for invoicing or to create purchase orders, as those paying you may be required to withhold tax at the highest marginal rate if you don’t have one.
 

If you are setting up your business using a company structure (as opposed to a sole trader or partnership structure) you need to apply for an Australian Company Number (ACN). It too is a unique number, this time assigned by the Australian Securities and Investment Commission (ASIC) following registration of a company.

Do I need to register for GST?

If your projected annual turnover is going to be $75,000 or above, or you drive a taxi or are involved in hire cars or intend to claim fuel tax credits, you will need to apply for an ABN and register for GST.

How should I make the final decision on business structure?

Each business structure becomes more complex as you move through the list above, particularly trusts. There are different tax concessions and reporting issues, which will vary by structure, by state and by industry. And they keep changing.
 

If you’re unsure or undecided, your accountant and financial adviser will be able to explain which structure is the most suitable for you – and help you manage the issues for each one.
 

Once you have decided what structure your business will have, you can carry out all the necessary applications and registrations in one place.
 

Next steps: Watch Business structures webinar

 

  • Business structuresBusiness structures
  • Turning your vision into a planTurning your vision into a plan
  • Statutory obligationsStatutory obligations
  • Risk managementRisk management
  • Cash managementCash management


This webinar is produced by the Davidson Institute, Westpac's home of free financial education resources, building confidence today for a better financial future.

 


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Things you should know

1. Westpac’s products are subject to terms, conditions, fees and charges; and certain criteria may apply. Before making a decision, read the disclosure documents for your selected product or service, including the Product Disclosure Statement and T&Cs for Westpac business bank accounts, by clicking the above link; and consider if the product is right for you.

The information in this article is general in nature; does not take your objectives, financial situation or needs into account; and does not constitute financial or taxation advice. Consider its appropriateness to these factors; and we recommend you seek independent professional advice about your specific circumstances before making any decisions.