Planning for Success

What structure do I need for my business?

If you are a new business owner, you may be wondering which business structure is right for your business. Maybe your business has changed significantly with COVID? Or, perhaps your business has outgrown its current structure.

Either way, it’s important to have a good understanding of what your options are so that you can choose the business structure that will work the best for you and your business now and into the future.

In Australia, there are 4 commonly used business structures. They are:

  • Sole trader
  • Company
  • Trust
  • Partnership

Each structure comes with its own responsibilities that will determine which one is best suited to your business. Let’s take a look at each business structure so that you can work out which one would be the best choice for your current business operations and why.

  • Sole trader

Operating your business as a sole trader is the simplest way to run your business. As a sole trader, you are the only owner of your business and you control and manage all aspects of your business. This means that you are 100% responsible for absolutely everything relating to your business. There are a few key points to consider if you are operating as a sole trader ae:

  • You cannot employ yourself (but you can employ other workers).
  • You are responsible for paying your own super (and your workers’ super).
  • You cannot share your debts and losses with other individuals.

Some other important considerations about being a sole trader include:

  • You must have an ABN (Australian Business Number).
  • If your annual turnover is $75,000 or more then you must register for GST (Goods and Services Tax).
  • Use your individual tax file number and individual tax return to lodge your tax returns under the section for business to document your income and expenses. There is no separate tax return.
  • You could be eligible for the small business tax offset.
  • Pay quarterly PAYG (Pay As You Go) installments to put money aside for the end of the financial year when you have to pay your income tax.
  • Claim deductions for personal super contributions.
  • Company

A company is a legal entity that is run by directors and owned by shareholders. It is more complicated to set up and comes with more administrative expenses. Unlike sole trader and trust structures, a company owns its profits and money cannot be taken out unless for wages or formal distributions. As a company, it’s important to consider:

  • You are required to lodge an annual company tax return and pay tax at the company tax rate.
  • If the company is a base-rate entity, then it could pay a lower company tax rate.
  • Must pay super and could be eligible for small business concessions.
  • Trust

A trust requires a formal deed that clearly outlines how the trust will operate. This requires initial and ongoing administrative costs that can be quite expensive. A trust requires a trustee who is legally responsible for the management of the trust. The trustee could be an individual or a company. Beneficiaries receive any profits from the trust. Here are some key differences:

  • How a trust pays tax depends on the wording of the deed and whether the beneficiaries receive any of the trust’s profits.
  • The trust is not required to pay tax if all the profits are distributed to adult beneficiaries.
  • The trustee is assessed on income that is distributed to beneficiaries who are minors or those who are non-residents.
  • If the trust accumulates net profit, the trustee is assessed based on the highest individual tax rate.
  • Partnership

Similar to a sole trader, operating your business as a partnership is fairly simple and inexpensive. A partnership structure includes more than one person who is responsible for and shares control of the business.

When considering going into partnership with other people then it is highly recommended to create a written partnership agreement that outlines all aspects of the operation of the business, including how responsibilities are delegated and how profits and losses are distributed. Here are some differences from the sole trader business structure:

  • A partnership has its own TFN (Tax File Number) and must lodge its own annual partnership return.
  • Unlike with the sole trader structure, a partnership does not pay income tax. Instead, everyone declares their own profit in their individual tax return.
  • Profits drawn from the business are not wages and you can’t claim deductions on money drawn.

How is your business structured?

If you are feeling overwhelmed about how to operate your business and you aren’t sure which business structure is the right choice for you, then talk to us about getting your business structure set up. We will eliminate all your confusion and make the process simple and easy to understand.

We are experienced bookkeepers, accountants and tax agents who can help you with all of your tax questions. Get in touch with us today.