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Need business structuring advice? Here’s the lowdown on choosing a business structure in Australia

April 26, 2022

It’s always a good idea to get business structuring advice before you launch. Many entrepreneurs jump head first into their new idea and end up paying more tax than they need to, or find themselves personally liable for business debts, all because they chose the wrong structure.

First, it’s important to understand that the main difference between a sole trader and company and other business structures comes down to four things:

  1. Profit distribution
  2. Tax obligations
  3. Risk
  4. Liabilities

Getting good business structuring advice is absolutely essential to make sure you understand all the implications of being a trust, partnership,  sole trader vs a company. Keep reading for an overview of your options when it comes to choosing a business structure in Australia.

What are the different types of business structures?

Here’s a snapshot of what business structure is right depending on your situation (we dive into each one in more detail below). For business structuring advice tailored to your situation, please reach out to us – this is general information only!

Sole trader

Many people think the sole trader structure is the “easiest option”. You do everything yourself and earn all the income, but you also bear all the costs and liabilities. It’s relatively easy and cheap to set up a business as a sole trader, and you can just use your personal TFN to lodge tax returns.

This structure appeals to people when they’re starting a business because it has less reporting requirements, and gives you full control of your day-to-day business decisions. It’s important to know being a sole trader has serious limitations, especially if your business grows beyond being a small income earner, and there are only certain circumstances in which it’s likely to be the best option for you.

Is being a sole trader right for your business?

  • If you’re only planning on your business being a hobby or side hustle and never your main source of income, a sole trader structure could be right for you.
  • BUT if you’re generating intellectual property (IP) or if there’s a potential of you getting sued, you probably want to avoid being a sole trader as you’ll be liable so your home and assets could be at risk.
  • Being a sole trader can seriously limit your flexibility and timing of income distributions, which could result in unnecessary tax obligations.

Partnership

Going into business with someone else (or a group of people) and want to be able to distribute income – and losses – between you? You might have heard of people structuring businesses as partnerships. You can read more about partnerships here but it’s very rare that we give business structuring advice to go down this route.

They might seem easy to set up on paper,  but there are different partnership laws in every state and territory in Australia, and it can get pretty messy to navigate, and it’s very rare that there’s not a better structure available.

Company

A company is different from a sole trader or partnership structure in that it creates a separate legal entity. Companies have the same legal rights as a person: they can sue and be sued, and make profits and losses in their own right. Companies generally have limited liabilities.

This provides greater asset protection to the founder (and their family) than being a sole trader or partnership, which is why it’s the most common structure we see for businesses * even small businesses). If you come to us for business structuring advice, we’ll definitely discuss companies in more detail.

Is being a company right for your business?

  • A company can issue shares and easily bring new investors into the business, so it’s actually a more flexible option than a sole trader or partnership structure, which is a big plus if you want to grow and scale your business
  • Companies pay their own tax on profits at a rate of 25% when revenue is <$50m. Compare this to the individual tax rate, which can be up to 47%, and it’s clear why it’s smart to be a company and not a sole trader when it comes to tax planning!
  • There are situations where the founders of a company are liable personally to pay things such as employee’s wages and superannuation, but in general, the company structure provides the best personal protection from liabilities.

Dual companies

A dual company structure sounds complicated but it actually is necessary for many businesses, especially when there’s any IP involved (think tech companies, startups, etc.). The holding company holds cash and your IP, and then you set up an operating company as your main trading entity, owned 100% by the holding company. The operating company is the one which engages your clients, employs staff and pays suppliers.

Is being a dual company right for your business?

  • If you have major assets to protect (IP and excess cash), a dual company structure generally makes sense because the holding company is protected from the liabilities of the operating company.
  • The operating company is the one more likely to be sued (e.g. by a customer) or have the greater liabilities (e.g. to suppliers) because they have the legal relationship, while the holding company owns the most valuable assets.
  • If you develop your own IP, a dual company structure is most likely the one you should need, but come chat to us and we can help make sure it’s right for you.
  • In many respects, the information above about the company structure generally applies to dual company structures, but there are some additional considerations about ownership of the holding company that we’ll dive into below.

Trusts

Trust structures can be a great way to make sure you’ve got flexibility around your assets. Trustee(s) are responsible for everything in the trust, and can be a person or a company, and it’s the trustees who decide how profits are distributed to beneficiaries.

In a trust structure, a trustee holds your business for the benefit of the trustee or other beneficiaries, and there’s more administrative work that has to happen every year with a trust, so keep that in mind!

Is being a trust right for your business?

There’s only certain circumstances that we’d recommend someone set up a trading business in a trust. If you’re thinking about going down this route, talk to us for advice that takes your situation into consideration.

Choosing a business structure is probably one of the more important decisions you’ll ever make about your business, so you want to get it right.

We’re passionate about helping startups grow and scale, and we’ll make sure you’re structured in a way that allows your business to thrive.

We offer a free discovery call to chat about your goals and see how we can assist you with tailored business structuring advice. Get in touch with us today to get started.

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