Starting a business is literally building something from the ground up. When you start you need a solid foundation (your business plan) and a structure to build on. Start-ups and businesses that forecast growth or substantial change need to carefully consider their business structure, as it’s much easier to start the right way, than have to change halfway through operation. Different business structures have different tax responsibilities, so weigh up the different options and decide what business structure is right for your situation.
There are four main ways to set up a business in Australia:
- Sole trader
Running as a sole trader is probably the easiest and most cost effective way to structure a business (when compared to a trust or company). You report the business’s profits on your own tax return and pay tax at individual rates, not company tax rates.
What you need to know about the sole trader structure: You are personally responsible for the debt of the business and may have to sell your own possessions to pay for it.
Partnerships are also easy to set up and run. If you have a partner or partners (multiple partnerships can make up a partnership), they can help you fund and run your business.
What you need to know about partnerships: You must share the profits from your business with the partners. You and your partners are responsible for all the debts in the partnership, even if your partner was the one who got the partnership into debt. Like sole traders, you are personally responsible for the debt of the partnership and may have to sell your own possessions to pay for it.
A company is a separate legal entity, which means that it owns its own assets and debts. As a result, if the company has debts your assets generally won’t be used to pay them off.
What you need to know about companies: Companies are more expensive to set up than sole traders or partnerships and usually cost more to run. They also have more tax reporting requirements. Companies are regulated by the Australian Securities & Investments Commission (ASIC), unlike partnerships and sole traders.
Companies lodge their own tax return each year with all the income the company had and deductions it claimed. It can also protect your personal possessions from being used to pay debts.
Trusts are more expensive to run than sole traders or partnerships, and can be more complicated to set up. It may also be more expensive to do all the tax and administrative paperwork for trusts each year.
What you need to know about trusts: Trusts can offer more protection. For example a trust can continue to exist even if the person running it dies (unlike sole traders or partnerships) and it gives more protection to assets. It can also protect your personal possessions from being used to pay debts. Certain trusts can also allow flexibility in where, and how much of, the trust’s income is distributed to; allowing for some tax planning.
Trusts that run a business must fill out a trust tax return, which shows all the income the trust earns and deductions it claims and the amount of income distributed to each beneficiary.
If you need advice or help with your decision about your business structure, talk to us to arrange a consultation.
Or check out how we’ve got some of our clients off to a great start, for more information.
Love the blog? Subscribe to receive it fortnightly.
What do you think?