Choosing the right business structure

Accounting, Australian Taxation Office, Estate Planning, FBT, Finance, Queensland Government, Refinancing, Superannuation, Taxation

Choosing the right business structure is a crucial step when starting a new business. It defines who owns and operates the business, affects your tax and registration requirements, determines your legal liabilities, risk and obligations. The structure chosen also affects your tax treatment during the life of the business but also the available tax concessions on sale of the business.

The decision on which business structure to use is one that should be based on a full understanding of not only the key points as listed below but additional items such as capital gains tax (CGT) concessions, employment of staff, future investors, business control, setup costs, windup costs and taxes.

A discussion should be undertaken in consultation with your accountant to ensure that your individual circumstances are fully considered, and you understand the advantages / disadvantages of each structure.

Here are the four commonly used business structures in Australia and basic Key Points.

  1. Sole Trader

A sole trader is an individual who owns and operates the business. This is the simplest structure.

Key Points:

  • Ownership: Owned by one person.
  • Tax: The owner reports business income on their personal tax return.
  • Liability: The owner is personally liable for all debts and obligations of the business.
  1. Partnership

A partnership involves two or more people who share ownership of the business.

Key Points:

  • Ownership: Owned by two or more individuals.
  • Tax: Each partner reports their share of the business income on their personal tax return. A Partnership tax return must also be lodged.
  • Liability: Partners are jointly and individually liable for the debts and obligations of the business.
  1. Company

A company is a separate legal entity from its owners, providing limited liability protection.

Key Points:

  • Ownership: Owned by shareholders.
  • Tax: The company pays corporate tax on its profits, and shareholders pay tax on dividends. A Company tax return must also be lodged.
  • Liability: Shareholders’ liability is limited to their investment in the company.
  1. Trust

A trust is an entity that holds property or income for the benefit of the beneficiaries.

Key Points:

  • Ownership: Managed by a trustee for the benefit of beneficiaries.
  • Tax: The trust itself may not pay tax; instead, beneficiaries pay tax on the income they receive. A Trust tax return must also be lodged.
  • Liability: The trustee is responsible for managing the trust and may be liable for its debts. Trustee can be either individuals or a corporate trustee.

Choosing the right structure depends on various factors, including the nature of your business, your financial situation, and your short & long-term goals. It’s beneficial to seek professional advice to determine the best structure for your specific circumstances.

If you have any questions or need further clarification on any of these structures, please reach out, call us on 07 5494 9173.