Choosing the right business structure

Business

When starting a small business, it’s easy for entrepreneurs to apply for an ABN and act as sole traders by default simply because it’s easy when they have no idea what it entails and what other options there are. There might be a better fit for you, but you’ll never know if you don’t do the research. Below, we’ve collected all the information we could find on the three main business structures and made them as brief as possible. Let’s begin!

Sole Trader

This is the simplest business structure. At its essence, it’s one person who owns a business. You are both the owner of the business and the one who runs it. You’ll be applying for and using an Australian Business Number (ABN) in your business dealings. You’ll be responsible for registering for GST if your annual turnover is $75,000+. Lastly, you’re also responsible for putting money aside to pay tax at the end of the financial year. In most cases, you’ll do this by setting up a quarterly Pay As You Go (PAYG) system.

Pros:

  • You own all aspects of the business and so all profits and successes are owned by you.
  • Business losses can be managed by writing off your PAYG tax from another job.
  • You can hire staff.
  • Tax-free threshold when profits are low.
  • It’s the cheapest to start up – $33

Cons:

  • Losses cannot be shared with anybody else.
  • You’re responsible for your employees’ wages, superannuation and your own superannuation.
  • Difficult to operate globally.

Partnership

The basic definition is as easy as it sounds. It’s a business run by two or more people who share profit, losses, control and responsibilities between themselves. While written partnership agreements are not entirely necessary, they are highly recommended so that all partners are clear on how income, losses, control and responsibilities are to be divided.

Many friends or family members who enter into partnerships attempt to do so without written agreements because they feel they’ll work well together, however, this can lead to difficult situations in the future, especially when large amounts of money are involved. To protect all partners, a written agreement should be thought of as necessary. 

Like a sole trader business structure, business dealings will also be made under an ABN and the partnership must be registered for GST if the annual turnover is above $75,000. Partners are also responsible for paying their own super and the that of their individual employees.

Pros:

  • Profit and loss distributed over more than one person makes dealing with losses and large responsibilities especially much easier.
  • Each partner pays tax based on the income they’ve received as individuals from the partnership. 
  • Each partner may hire employees and are responsible for the employees they hire.
  • Tax benefits and offsets exist, especially if partners are from the same family.

Cons:

  • Can be difficult to shut down a partnership, especially if a written agreement was never made or signed.
  • High start-up fee – $359.90 (can be shared amongst partners)
  • Involves relying on others to pull their weight to keep the business afloat and successful.

Company

Companies are slightly more complex than the aforementioned business structures. By definition, a company is an entity run by directors but owned by shareholders, and they’re regulated by the Australian Securities and Investments Commission (ASIC) which means they’ll be issued and identified with an Australian Company Number (ACN) however, if companies are conducting business in Australia, they’ll need to register for an ABN too. Companies can provide some protection of assets and protection against debt, however some can hold directors liable for their actions and for the company’s debt.

There are a few types of companies depending on their liability types. They can be read about in detail in this PDF but we’ve used it for information about the two most commonly seen types:

  • Public company: one whose shares are owned by the public. No limit on the number of shareholders and no limit on the amount a public company can borrow money from the public. Liability of shareholders is “limited” to the balance owing on their shares, hence the “Ltd” suffix after the company name.
  • Proprietary (or private) company: one whose shares are not sold to the public. Directors must approve any transfer of shares. Must have a minimum of one member and up to 50 non-employee members (shareholders). Liability of shareholders is limited to the uncalled amount owing on their shares. Hence the suffixes “Pty Ltd” after the company name.

Like both sole traders and partnerships, companies must register for GST if their annual turnover is above $75,000 and can make PAYG tax payments. The biggest difference between a company as opposed to a partnership or sole trader is that once a business becomes a company, it is not associated with the person who started it any longer. As a sole trader, you are your business. Likewise, in a partnership, money is divided amongst partners and then employees are paid. However, in a company, there are only directors and members. While a company can be owned and run by one person (one person company), the company is not one and the same as the person owning it, especially at tax time.

Pros:

  • Entitlements to purchase assets (properties, vehicles, etc.) under the company name and write them off for tax through the company.
  • Can provide asset protection and limited liability.
  • May be eligible for tax cuts and concessional rates.
  • Easier to operate globally.

Cons:

  • High start-up fee – $444.
  • Director(s) can’t take money out of the company except as formal distribution of profits as wages, i.e. profit does not all belong to the owner.
  • Fairly difficult to close down due to distribution of shares and liabilities if they exist.

There you have it! These are the three most common business structures that you’ll be looking into when starting a new business. They all have their pros, cons and similarities so make sure you research them in detail before making the choice for you based on how you’ll be conducting business, where you’ll be conducting it, who you’re conducting it with, and how much you’re projected to make.

Tell us which business structure you chose and why it appealed to you. Why did you find it the best fit for you? Your insights could help someone else with burning questions. We hope this resource was informative. Check out the rest for more on everything small business-related.