I’m wanting to start a business – What’s the best business structure for me?
So you’re thinking of starting your own business? Congratulations, this is an exciting step! You probably have a lot of questions running around in your head – what’s the right structure for me? When and what taxes will I have to pay? Can I employ people? When should I pay my Super? The list goes on.
Our Small Business Series helps to answer many of these questions. Kicking off the first part of the Small Business Series is “What structure is right for me?”
In Australia, there are four commonly used business structures:
- Sole trader
It’s important to understand that each of these structures have varying responsibilities; the structure you choose can have an impact on the taxes you’re liable to pay, asset protection and costs. Let’s take a closer look.
Choosing to become a sole trader essentially means you, as an individual, are running your own business. In terms of costs, this is the simplest and cheapest way to structure your business.
As a sole trader, you are legally responsible for all aspects of the business. Debts and losses can’t be shared with other individuals.
You can employ people to help run your business under the sole trader business structure.
As per above, there are obligations as a sole trader around paying superannuation for your employees. You are also responsible for your own super, and can opt to pay it into a fund for yourself to help save for your retirement.
As a sole trader, you only need to register for Goods and Services Tax (GST) if your annual GST turnover (your business’ gross income excluding GST of 10%) is $75,000 or more. If you fall under this category, you’ll also be required to lodge a Business Activity Statement (BAS). Depending on the size of your business, you may have to lodge your BAS every three months or just once per year.
If your annual GST turnover is less than $75,000, and therefore not registered for GST, you will receive an Instalment Notice in your first or second year of business.
A partnership is a business structure made up of 2 or more people who carry on a business and distribute income or losses between themselves. If you and a friend or a family member set up a business together, you might choose to operate it as a partnership. Partnerships are relatively inexpensive to set up and operate.
In a partnership, income and losses are distributed amongst partners. In some instances, a partnership agreement can be drawn up to outline how income or losses will be distributed amongst the partners and how the business will be managed.
The partners in a partnership are not employees, but the partnership can employ other people.
Partners are responsible for their own superannuation arrangements. However, the partnership is required to pay superannuation for its employees.
A business set up as a partnership is required to have an Australian Business Number (ABN) and use it for all business dealings. The partnership does not pay income tax on the income earned – instead each partner pays tax on the share of the net partnership income that each partner receives. A partnership tax return is required to be lodged with the ATO each year.
A company is a separate legal entity. A company has the same rights as a natural person and can incur debt, sue and be sued. Unlike a sole trader or a partnership structure, setting up a company is far more complex and comes with higher set-up and administration costs.
If you’re a sole trader, you can turn your business into a company at any time. Reasons you might change to a company structure include:
- You’re employing more people
- You have a greater number of assets
- You are looking to apply for Government tenders (Government tenders will only work with registered companies).
While a company provides some asset protection, its directors can be legally liable for their actions and, in some cases, the debts of the company.
A Company can employ people.
Companies 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.
Companies must apply for a Tax File Number (TFN) and use this when lodging the annual tax return. If the annual GST turnover is $75,000 or more, the company must be registered for GST. Companies will pay tax at the company tax rate.
A trust is a relationship between a trustee (an individual or a company) who is required to look after the property of the trust and the beneficiaries. Trusts can be expensive to set up, because a formal deed is required outlining how the trust will operate.
A Trust can employ people.
Trusts may pay superannuation for any of its employees (this may include the trustee if they are also employed by the trust).
A trust must have its own Tax File Number (TFN) for lodging its annual tax return. The trust must be registered for Goods and Services Tax (GST) if the annual GST turnover is $75,000 or more.
When considering starting up your own business and deciding on the right structure, it’s important to remember that you’re not locked into any structure and you can change the structure as your business changes and grows.
If you’re unsure which structure to choose, we recommend organising a meeting with our experienced and professional accounting team.