Before you can register a business, you’ll first need to consider what business structure you would like to have.

With four different structures offered by the Australian Government, it’s essential to do your research and find one that most accurately suits your business.

The smartest way to reach a decision is to think about the end goal of your business, rather than where you’re currently at. By changing your structure later, you’ll possibly be liable for capital gains tax which can be extremely costly.

What things should I consider?

Each structure offers its own set of advantages and disadvantages relating to things such as income tax, asset protection, responsibilities of the business owner, and ongoing costs for your business.

There are a few things to keep in mind when considering each structure, such as:

• The profitability of the business now and its potential in the future;
• The industry you’re in and its risk profile; and
• The tax position of your stakeholders.

Deciding which one is right for you will depend on how important each of these factors is, so having your end goal in mind is essential.

Sole Trader

As the structure with the least legal and tax formalities, the sole trader is the simplest and cheapest to use. However, this doesn’t mean it is right for all businesses. A sole trader works on his or her own and manages their business by themselves.

A sole trader still has the ability to hire staff, but any debts or losses the business incur cannot be shared with anyone else. If your business goes into debt, your assets will be under threat, and any profits your business makes are solely yours as well.

Partnership

The next simplest of the structures, a partnership involves an association of people within a business. These people share the losses and profits and contribute in their own ways to the running of the business.

Partners within a business are responsible for paying their employee’s super contributions, and responsible for their own as well. When in a partnership, this structure doesn’t pay income tax on profits but rather a tax is paid by each partner on the profit they receive.

Company

A company is a legal entity, and as such is more complicated than the previous structures. Australian Securities and Investments Commission (ASIC) regulates all companies, which are run by a director but owned by shareholders.

If choosing a company structure, directors can be held responsible for their actions and the debts of a company, but it does provide some asset protection. All money earned by a company belongs to the company and not the individual, and they’re often eligible for tax concessions.

Trust

This structure encompasses the business of a company being carried out by a trustee on behalf of a company or individual. It can be expensive to set up and take time to run as there is a need for administrative duties to be completed throughout the year.

The trustee is legally responsible for the trust, with profits going to the trust’s beneficiaries. While the trust is not liable to pay tax, the trustee or beneficiaries must do so on its behalf. This structure gives greater flexibility of asset and income distribution as well as protecting assets, so it’s sometimes ideal.

As choosing the right business structure is essential to get right the first time, it pays to speak with a professional on what is the best decision for you.

We invite you to contact us at Hart Partners for an in-depth and tailored discussion on your business’s financial needs on 03 9600 3220.