Business structures in Australia
Updated: 17 June 2020
Ever wondered which business structures exist in Australia? and how they work?
There are 4 main business structures in Australia, these are 1) sole trader 2) company 3) partnership and 4) trust.
I'll discuss each below.
Who is using the sole trader structure?
All sorts of people use the sole trader structure.
Everyone from freelancer graphic designers, web developers, consultants through to to trades people like plumbers, carpenters and electricians, all choose the sole trader structure.
Why use the sole trader structure?
The sole trader structure is simple to set-up and costs little to setup.
You simply apply for an Australian Business Number (ABN) to set it up.
So its simple to setup. Are there any disadvantages?
Now, as a sole trader, you are personally liable and there is no separation between your personal assets and the business’s assets - they are one and the same, unlike the company structure.
Also, you'll pay taxes at the individual rates.
In contrast to the sole trader structure, a company does allow a separation between your assets and the business’s assets.
You are liable to the value of your company assets only.
Because a company has its own legal personality, it can sue and be sued.
Also, you can allocate shares to shareholders.
And, for these reasons, the company structure is quite popular amongst Australian startups taking risks and bringing investors on board.
What does it cost to setup a company ?
There is the initial ASIC registration which is around $500 at the time of writing. If a lawyer or accountant registers your company, you’ll need to pay them a service fee.
Also, there is an annual renewal fee which you pay to ASIC, currently around $300.
And then there’s income tax preparation, while fees can vary, $2,000 + is a good indicator of a starting point.
A partnership is a group of people carrying on a business together.
You would pick this structure if you are working with up to 20 others, are not interested in bringing investors on board through share allocation.
Also, you can choose from a general or limited partnership.
The legislation for partnerships varies for each state and territory in Australia.
This structure is typically used by professional service providers like accountants and lawyers.
What’s involved in setting up a partnership?
A partnership is fairly simple to set up and inexpensive.
You’ll need a separate tax file number (TFN) and an ABN to use for all business dealings.
Similar to the sole trader entity, you and your business partners are personally liable for the business debts. Each partner pays tax on the share of net income they each receive.
Each year a partnership tax return needs to be lodged.
And, each partner is responsible for their own superannuation as they aren’t employees.
Finally, a trust is an entity that holds property or income for the benefit of others.
Trusts can be expensive to setup. Setup costs include a trust deed, there are formal yearly administrative tasks and if you operate your business as a trust, the trustee is legally responsible for its operations.
A trustee of a trust can be a company, providing some asset protection.
Business name and GST
In Australia, to run your business, you can register for a business name as well, but make no mistake, a business name is not a separate legal entity.
And, a business name is just that - a name. It does not have its own legal personality.
Also, registering a business name does not provide instant protection for your intellectual property - however you may wish to speak to an IP lawyer about steps you can take to protect your IP.
Regardless of your business structure i.e. sole trader, company, partnership or trust, you’ll need to be registered for GST if your annual turnover is $75,000 or more each year.
And, if you provide taxi or limousine travel for passengers (including ride-sourcing) in exchange for fares, you will need to be registered for GST regardless of your turnover.
I wish you success in your ventures!