Starting a business comes with its questions. What kind of business? How much investment will I need? And of course, what business structure should I choose?
Luckily, there are not hundreds of options. Actually, there are 4 commonly used business structures in Australia:
1. Sole Trader
If you are going to be the only individual running the business, it is by far the most convenient structure. It’s cheap and easy to set up and you pay taxes on the individual income tax rate.
In my experience, the only cost I had was the registration of a business name for my e-commerce store and it was $37.
You are legally responsible for all things financials, meaning that if your business gets a debt and doesn’t have the financial resources, you may be asked to use your personal assets to pay it off.
You can hire employees and will be responsible for paying their super.
According to the ATO (Australian Taxation Office), as a sole trader you:
- “use your individual tax file number when lodging your income tax return
- report all your income in your individual tax return, using the section for business items to show your business income and expenses (there is no separate business tax return for sole traders)
- apply for an ABN and use your ABN for all your business dealings
- register for Goods and Services Tax (GST) if your annual GST turnover is $75,000 or more
- pay tax at the same income tax rates as individual taxpayers and you may be eligible for the small business tax offset
- put aside money to pay your income tax at the end of the financial year – usually, you will do this by paying quarterly Pay As You Go (PAYG) instalments
- claim a deduction for any personal super contributions you make after notifying your fund.“
Find more info on their web page about Sole Trader.
2. Company
You can be on your own and start a company, however it costs more money to set up and get running. According to business.gov.au, when you set up company you need to pay for:
- choosing and reserving a company name – from $51,
- registering your company – $506 for a proprietary limited company,
- registering a business name – $37 for a year, $87 for 3 years.
There are 2 types of company tax rates: the full company tax rate (30%) and the lower company tax rate (27.5%). You can find more info on this here.
According to the ATO, the company:
- “must apply for a tax file number (TFN) and use it when lodging its annual tax return
- is entitled to an Australian business number (ABN) if it is registered under the Corporations Act 2001. A company not registered under the Corporations law may register for an ABN if it is carrying on an enterprise in Australia
- must be registered for GST if its annual GST turnover is $75,000 or more
- owns the money that the business earns – the individuals who control the business cannot take money out of the business, except as a formal distribution of the profits or wages
- must lodge an annual company tax return
- usually pays its income tax by instalments through the pay as you go (PAYG) instalments system
- pays tax at the company tax rate or lower company tax rate (if a base rate entity)
- may be eligible for small business concessions
- must pay super guarantee contributions (SGC) for any eligible workers. This includes you, if you are a director of the company, and any other company directors.”
You can find more information about it on their page Company. Go to this page to see the main differences between Sole Trader and Company.
3. Partnership
If you’re planning on starting your business with a friend or relative, you may want to consider this business structure. It is quite easy and cheap to set up, and you’ll need to choose among 3 types of partnership. According to business.gov.au, these are:
- General partnership (GP) – is where all partners are equally responsible for the management of the business, and each has unlimited liability for the debts and obligations it may incur.
- Limited partnership (LP) – is made up of general partners whose liability is limited to the amount of money they have contributed to the partnership. Limited partners are usually passive investors who don’t play any role in the day-to-day management of the business.
- Incorporated Limited Partnership (ILP) – is where partners in an ILP can have limited liability for the debts of the business. However under an ILP there must be at least one general partner with unlimited liability. If the business cannot meet its obligations, the general partner (or partners) become personally liable for the shortfall.
More information on the ATO dedicated page.
4. Trust
Now, I have to say that this one is a bit more complicated to me, and having chosen the Sole Trader structure, I haven’t really considered this option. For this reason, I will give you the definition from business.gov.au:
“A trust is an obligation imposed on a person (a trustee) to hold property or assets (such as business assets) for the benefit of others, known as beneficiaries.
If you want to set up a trust, keep in mind that trust structures:
- can be expensive to set-up and operate
- require a formal trust deed that outlines how the trust operates
- require the trustee to undertake formal yearly administrative tasks
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.”
Here is the information from ATO.
I’ve established my business as a Sole Trader, so feel free to let me know if you have any questions on the matter. I am also open to contributions if anyone has experience with the other business structures, just email me with your details and I’ll update the post.
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