There are a lot of decisions to make when starting a business. One of the first - and most important - is choosing the right business structure.
Even before registering a business name, you should know how your business will be structured and what it means for tax, decision-making and liability.
An overview of business structures in Australia
Australia has four main types of business structures: sole trader, company, partnership and trust. Each has its own considerations, conditions and ramifications, from ABN registration to tax liability to reporting requirements.
A sole trader is a business owned and operated by one person. It’s the simplest and most common business structure, and it’s relatively easy to set up. As a sole trader, you are limited to trading under your given name unless you register a business name or ABN.
There were 687,568 sole traders operating on June 30, 2023, making up 30% of Australia’s total businesses.
Sole traders can use their individual tax file number (TFN) to lodge tax returns, although you need to maintain financial records for at least 5 years.
Sole traders can even hire employees. However, sole traders are personally liable for the business’s debts and obligations. Liability is unlimited, meaning your personal assets are at risk if the company fails.
In a partnership structure, two or more people own and operate the business, sharing operating responsibilities and profits. Partnerships are similar to sole traders in that they are relatively easy to set up, and partners are also personally liable.
Unlike sole traders, however, partnerships must complete an ABN registration and operate under a registered business name. Although the partners only pay tax on their share of the net partnership income, the ATO requires an annual tax return from the partnership as an entity.
There are three kinds of partnerships:
- General partnership (GP): All partners are equally responsible for managing the business and have unlimited liability for its debts and obligations.
- Limited partnership (LP): Consisting of general partners who run the business and have unlimited liability for the partnership’s debts and obligations, and limited partners who take a back seat and whose liability is limited to the amount they invest.
- Incorporated limited partnership (ILP): All partners have limited liability for the partnership’s debts and obligations; however, there must be at least one general partner with unlimited liability.
Partnership ABN registrations represent a smaller slice of the landscape, with 239,938 trading as of June 30, 2023.
A company is a legal entity separate from its owners, which means it can incur debt, sue and be sued. Company directors are generally not responsible for the firm’s obligations, although they can be held liable if they break the law.
Companies require ABN registration, and directors must apply for a Director ID before trading under the registered business name. There are also tax and reporting obligations for companies with a registered ABN, including:
- Annual tax returns
- ASIC’s annual review (including a fee)
- Annual declaration of solvency
- Registering for GST if income exceeds $75,000 (sole traders and partnerships must also do this)
Companies must comply with the Corporations Act 2001, which covers requirements like financial record-keeping, director IDs and what to do if your company is in financial trouble.
However, the additional cost and complexity of running a company offers some advantages:
- Wider access to capital
- Ability to offset losses
- Limited liability for company members
- More flexibility if you expect income to fluctuate
- Opportunity to earn dividends on company profits
These advantages can help explain why 40% of Australian businesses are companies with a registered ABN.
A trust is a legal arrangement where a trustee holds assets for another person or group of people (beneficiaries). Trusts serve various purposes, such as family estate planning, holding real estate, protecting assets and tax planning.
You may not need to register an ABN, although you will need to create a trust deed outlining the terms of the trust. Trusts also need a trustee, the person responsible for managing the assets.
Here’s where trusts get confusing: Companies can be trustees, meaning one company holds another company’s assets. This is typically done to provide protection from creditors and reduce tax liability. In this case, the trust does need to register a business name and follow ABN registration guidelines.
Trusts, although complex to change or dissolve, are nearly 20% of Australia’s registered businesses.
What about co-operatives, Indigenous corporations and joint ventures?
There are a few more business structures that, while less common, represent an essential part of Australia’s business landscape.
A co-operative is a member-owned incorporated entity formed to provide services to its members rather than maximise financial return. Co-operatives are governed by a member-elected board, who all have an equal vote regardless of their shareholding.
Members are usually expected to contribute equally and are rewarded with access to cheaper or better goods and services.
Indigenous business owners can register Indigenous corporations to gain eligibility for additional benefits. These types of businesses are generally used to support the education and housing needs of Aboriginal and Torres Strait Islanders, secure land, seek greater recognition for Aboriginals and Torres Strait Islanders, provide legal assistance, develop infrastructure, or promote Indigenous culture through art, performance and music.
A joint venture is a partnership between two or more parties to work together on a specific project. It can be temporary or permanent, and can be used to share resources, expertise and costs. Joint ventures can help businesses grow and expand without taking on too much liability.
Which Structure is Right for You?
The right business structure depends on your circumstances, the type of business you’re starting and your long-term goals. If you’re unsure which structure is best for you, talking to an accountant or lawyer is a good idea.
If you’ve done your homework and are ready to register a business name or finalise your ABN registration, Registry’s affordable online services make the process simple.