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 structure to choose. This structure will also determine whether you need to register for an ACN as well as an ABN.
ABN & ACN – what’s the difference?
ABN is short for Australian Business Number, while ACN is short for Australian Company Number. An ABN can be issued by the Australian Tax Office (ATO), on all business types including sole trader and partnership registrations, but an ACN can only be assigned by the Australian Securities and Investment Commission (ASIC), to a business that registers as a company.
Which business type?
There are four different types of business structure. Before choosing which is right for you, consider the pros and cons for each.
As a sole trader, you are the sole owner and have all of the control. The business can trade under your name or a registered business name. You will need to register your business name, and get an ABN. The income you earn from the business is treated as your own, so you will pay tax at the same rate as individual tax payers.
- It’s easy and is lower cost to set up
- As the owner, you have 100% control and keep all of the profit
- There’s less compliance and legal requirements
- As the owner, you have unlimited personal liability
- The business has no back if you fall ill
- It can be more difficult to raise finance
In a partnership, the business is owned by two or more partners and the income is received jointly. An agreement or contract outlines any; 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. The partnership will need an ABN and its own tax file number. Each partner will pay tax on their share of the net partnership income.
- Partners share risk and responsibility
- It’s easier to raise finance with more partners
- There’s a broader skill set and management base
- Each partner is personally liable for debt
- Authority is divided amongst partners
- There are limits on partnership size
A family trust, or discretionary trust, is similar to a company. A trust is commonly set up with a company acting as trustee. It can be complex to set up and administer and you should check with your solicitor on whether it suits your individual circumstances. You will need an ABN and a tax file number in the trust name.
- Limited liability is possible
- A trust is more private than a company
- Greater flexibility in income distribution
- It’s more costly to set up and run
- More compliance and legal requirements
- Powers are restricted to the trust deed
The words ’Pty Ltd‘, after a business name, indicate that it’s a registered legal entity trading in its own right. The company has shareholders (who invested in the start up of the business) 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. The company will need to be registered with the Australian Securities and Investment Commission (ASIC), which will issue an ACN. A company will need its own tax file number to lodge its own annual income tax return.
- Financial liability is limited to the company assets
- It’s easier to raise finance for expansion
- Ownership can be easily transferred
- Must publicly disclose key information
- Extra regulations around record keeping
- Owners can’t offset losses against other income
You should also consider:
- GST implications: You will need to register for an Australian Business Number (ABN) and for GST if your projected 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.
- Tax implications: The 2012 changes in taxation have meant people with a taxable income of up to around $200,000 will pay less than the company tax rate.
There are many more complex issues to consider when deciding on a business structure are summarised on FindLaw Australia Website.
How to decide?
Each structure becomes more complex as you move down this list, 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.