BUSINESS INFORMATION
Business structures
Choosing the right structure is a crucial decision when starting a business.
Your choice will depend on the size and type of your business, personal circumstances, and growth plans.
You can modify your structure to suit new needs as your business evolves or circumstances shift.
Before starting your business, consult a financial, legal, or business adviser about your proposed structure.
Your choice of business structure can impact:
- Tax obligations
- Owner Responsibilities
- Potential personal liability
- Asset protection
- Ongoing costs and administrative requirements.
Find out more about each business structure
Advantages of being a sole trader
- Simple to establish and operate.
- Complete control of business decisions and assets.
- Reduced reporting requirements.
- Business losses can offset other income under certain conditions.
- Use your individual tax file number (TFN) for tax returns.
- No payroll tax, superannuation, or workers’ compensation on your income from the business.
- Easy to transition to a different business structure or cease operations if needed.
Disadvantages of being a sole trader
- Unlimited liability: personal assets are at risk.
- Limited tax planning: profits cannot be split with family members, and personal liability applies to all business income.
Other factors to consider
Business name
You are not required to register a business name if trading under your own name. If you use a different name, registration with the Australian Securities and Investments Commission (ASIC) is mandatory. Before registering, you must obtain an Australian Business Number (ABN). Check the availability of the name as a trademark, business name, and domain name. Registering the name as a trademark in relevant classes grants exclusive rights in those areas.Tax requirements
Business income or loss is declared on your personal tax return and taxed at individual rates. Register for goods and services tax (GST) if annual turnover exceeds $75,000. The Australian Taxation Office (ATO) may require pay-as-you-go (PAYG) instalments after assessing your income tax return. Consider budgeting for future tax liabilities.Insurance
As a sole trader, you hold unlimited liability, including personal and jointly-owned assets. Workers’ compensation does not apply to you, so injury or inability to work may lead to income loss while maintaining business expenses. Explore various insurance options to protect your business. For further details on tax obligations, PSI (personal services income), and insurance considerations, visit the ATO and insurance provider websites.Advantages of a partnership
- Straightforward to establish.
- Minimal reporting requirements.
- Shared management and decision-making responsibilities.
- Tax losses can be offset against personal income under certain conditions.
- Easier to dissolve compared to other business structures.
- Partners are not employees, eliminating requirements for superannuation contributions and workers’ compensation insurance.
- Access to broader financial resources, as income and assets are shared among partners.
Disadvantages of a partnership
- Not a separate legal entity, so personal assets are unprotected against business debts.
- Potential for disagreements regarding profit sharing, control, and direction.
- Ownership changes can be challenging and often require establishing a new partnership.
Other factors to consider
Partnership agreement
A legally prepared agreement is highly recommended before starting a partnership. This document should outline:- Roles and authority of each partner.
- Financial contributions from all partners.
- Processes for resolving disputes.
- Procedures for withdrawal or dissolution of the partnership.
Tax requirements
Partnerships themselves are not taxed on income. Instead, each partner is taxed individually on their share of net income, based on their respective tax rate. PAYG instalments may be required, similar to a sole trader.TIP: Ensure a formal partnership agreement is in place for tax purposes, especially if profits and losses are not distributed equally.
A company is a separate legal entity that can incur debt, sue, and be sued independently of its owners (shareholders). Shareholders have limited liability, meaning they are generally not personally responsible for the company’s debts. Companies are more complex and have higher setup and maintenance costs. You can form a company as either a private (proprietary) or public entity. A registered company must have at least one director and, if not a private company, a company secretary. The director is responsible for managing the company’s operations.
To become a company, the entity must:
- Be incorporated under the Corporations Act 2001.
- Be registered with the Australian Securities and Investment Commission (ASIC).
For more information on starting a company, visit the ASIC website.
Advantages of a company
- Limited liability for shareholders.
- Well-accepted and recognized business structure.
- Ability to raise significant capital.
- Losses can be carried forward to offset against future profits.
- Easy transfer of ownership and ability to sell.
- Profits can either be reinvested or distributed as dividends.
Disadvantages of a company
- High setup and ongoing maintenance costs.
- Loss of complete control over operations.
- Complex reporting and regulatory requirements.
- Losses cannot be distributed to shareholders.
Other factors to consider
Tax requirements
Companies pay income tax on their profits at the company tax rate. Unlike other structures, there is no tax-free threshold, so tax is paid on all income.
For further details, visit the Australian Taxation Office (ATO) website for your company’s tax obligations.
Legal requirements
Company officers and directors are bound by specific legal obligations under the Corporations Act 2001 and must comply with regulations on how they manage and operate the company.
For more information, read ASIC’s guide for small business directors and small business operator obligations.
A trust is a structure where a trustee manages the business on behalf of the trust’s members (beneficiaries). The trust itself is not a separate legal entity. The trustee, who can be an individual or a company, is responsible for the trust’s debts and may use trust assets to meet these obligations. However, if there is a shortfall, the trustee is personally liable for the difference.
A trust is established through a trust deed and can be either a discretionary or unit trust. In a discretionary trust, the trustee decides how to distribute funds to beneficiaries. In a unit trust, the trust’s interest is divided into units, and the distribution is based on the number of units held by each beneficiary.
Advantages of a trust
- Reduced liability, especially if managed by a corporate trustee.
- Protection of assets.
- Flexible distribution of assets and income.
Disadvantages of a trust
- Expensive and complex to set up and manage.
- Difficult to dissolve or alter, particularly if children are involved.
- Retained profits may incur penalty tax rates.
- Losses cannot be distributed, only profits.
Other factors to consider
Tax requirements
A trustee must apply for a tax file number (TFN) and lodge an annual trust return. While the trust itself is not taxed, tax is assessed to the trustee or the beneficiaries entitled to the trust’s net income. If income is not fully distributed to beneficiaries, the trustee will be taxed at the highest marginal rate on any undistributed income.
For more details, visit the Australian Taxation Office (ATO) website for your trust’s tax obligations.
Tip
Some businesses, particularly in sectors like agriculture, retail, and manufacturing, may consider joining or forming a cooperative. A cooperative is a member-owned organization with at least five members. Learn more about co-operatives on the Department of Mines, Industry Regulation and Safety website.
Comparing each business structure
The four main business structures commonly used by small businesses in Australia are compared below.
| Business structures | Sole trader | Partnership | Company | Trust |
|---|---|---|---|---|
| Is the structure difficult to set up? | No | No | Yes | Yes |
| Is it expensive to register? | No | No | Yes | Yes |
| Do I retain complete control? | Yes | No | No | No |
| Are there complex reporting requirements? | No | No | Yes | Yes |
| Will my assets (house etc.) be under threat if my business goes into debt? | Yes | Yes | Not as likely | Not as likely |
| Do I receive full profits made from the business? | Yes | No | No | No |
| Can I employ staff? | Yes | Yes | Yes | Yes |
| Do I have to pay myself superannuation, workers comp etc.? | No | No | Yes (if employed by the company) | Yes (if employed by the company) |
| Can I change the legal structure easily? | Yes | No | No | No |
| Do I have the ability to plan tax through avenues like income splitting? | No | Yes | Yes | Yes |
| Is it easy to raise capital? | No | Yes | Yes | Yes |
| Is it easy to dissolve or exit? | Yes | Yes | Yes | Yes |
SMALL BUSINESS HELPLINE
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