Whether you are just starting a new business or have been in business for a while, it is important to understand the business structure under which your business operates.
There are four structures - Sole Trader, Partnership, Company and Trusts. Each structure has its own set of 'rules' which greatly affect how the business should be operated.
The different structure types are explained below:
SOLE TRADER
simplest structure and the least costly to set up
you trade on your own and control and manage the business
you are legally responsible for everything in your business
personal assets are not protected
your individual tax file number applies to your business
you should apply for an ABN and GST (if applicable)
the business income is treated as your own income and is reported on your individual tax return along with any other income you receive
sole traders are eligible for the tax free threshold
sole traders can take drawings from their business but these aren't treated as wages and as such are not tax deductible
you are responsible for paying your own super.
PARTNERSHIP
more than one person carries on the business and they receive income jointly
cheap to set up like the sole trader
partners share control and management of the business
income and losses are shared as are the debts
it has its own tax file number, ABN and can register for GST
income tax is not paid by the partnership, rather, each partner will pay tax on their share of the income
even though the partnership doesn't pay tax itself, a tax return must be lodged for the partnership
partners can take drawings from the partnership but these are not wages and are not tax deductible
you are responsible for your own super because you are not an employee of the partnership
COMPANY
owned by shareholders, controlled by directors
personal assets are protected but directors can be liable for their actions and in some cases, company debts
has its own tax file number and ABN
the income earned by the company belongs to the company
a tax return is lodged for the company, tax is paid on company profits at the current rate
directors are usually made employees of the company and as such receive a wage from the company
incorporated companies are regulated by ASIC (Australian Securities & Investment Commission)
there are additional reporting requirements for companies and as such, set-up costs and ongoing fees are quite costly.
TRUST
a trustee holds property or assets (business assets) for the benefit of others (beneficiaries)
can be expensive to set up and maintain
the trustee is legally responsible for the business operations
a trust has its own tax file number, ABN and can register for GST
not all trusts pay tax - depends on the type of trust, the wording of the trust deed and whether or not all net trust income is distributed to beneficiaries
there are several variations on how trusts are set up which impact whether or not tax is paid and by who - seek advice from your tax professional to find out how you may be affected.
This information is very general in nature. Before making any important decisions, I suggest that you speak with an accounting professional about your business structure and any other aspects of your individual financial situation.