How to Choose the Right Business Organisational Structure for You
Choosing the right business structure will save you time and money in the long run. The four most common
business structures in Australia are listed. Click on each one to find out their advantages and disadvantages
as well as how to pay income tax and super for each.
Factors affecting your choice of business structure depend upon your business and personal circumstances
and include: taxation, liability, capital, management, purpose of the business, costs of the business structure.
Please note that the information provided for each page is largely taken from the www.business.gov.au.
Sole Trader
As a Sole Trader you set up a business and conduct the business alone, without a partner whether you have
employees or not. It requires the least reporting to government.
This may include setting up a home business, setting up a business website and/or setting up a business account.
Sole Trader Advantages
- Very few legal and tax formalities in setting up the business.
- Inexpensive to set up.
- You have full control of the business.
- You receive the full benefit of profits made by the business.
- You keep all the after-tax gains if the business is sold.
Disadvantages of a Sole Trader
- Your access to finances is usually limited to your own resources.
- You are legally responsible for all aspects of the business.
- Debts and losses cannot be shared.
- You can lose private assets such as your home, if the business goes into debt.
Reporting and Paying Income Tax as a Sole Trader
You need to report the business income you earn (after expenses) on your personal income tax return,
along with any other income you earn. You pay the same tax as any other individual and you're also entitled
to the tax-free threshold (the first $6,000 you earn in an income year) if you're an Australian resident.
Paying Super as a Sole Trader
You are responsible for your own super arrangements and may be able to claim a deduction for personal super
contributions you make. You must also make super contributions for any eligible workers you employ.
Partnerships
A partnership (be it a limited liability partnership or regular partnership) is where you conduct business with
one or more other people as partners and receive your income jointly. There is a range of partnership advantages and disadvantages:
Partnership Advantages
- Inexpensive to set up.
- Greater access to finances from the resources of all partners.
- You and your partner(s) share the workload.
- More people to share losses and legal responsibilities.
Partnership Disadvantages
- Profits must be shared with the other partners.
- Debts of the partnership are your responsibility, even if you do not incur the debt.
- Assets such as your home and vehicles can be lost to settle the debts of the partnership.
Reporting and Paying Income Tax as a Partnership
Although your business does not pay tax, you need to lodge an annual partnership income tax return
on behalf of the business. This shows the total income earned and deductions claimed by the business.
The tax return also shows each partner's share of net partnership income.
As a partner, you need to pay tax on your share of the partnership income (less expense) you earn.
Also, each partner is personally liable for the tax debts of the partnership.
Paying Super as a Partnership
As a member of the partnership, you're responsible for your own super arrangements as you are not an
employee of the business. You may be able to claim a deduction for any personal super contributions you
make, and the partnership must make super contributions for any eligible workers they employ.
Companies
A company is a distinct legal entity that is regulated by the Australian Securities and Investment
Commission (ASIC). It is more difficult setting up a company.
In order to set up a company you must consider the set-up and administrative costs which are generally higher than for other business structures.
Company Advantages
- A company has far greater access to capital to run the business.
- A company pays tax on its own profits.
- Shareholders are not liable for the debts of the company.
- Increased asset protection.
Company Disadvantages
- More expensive to establish a new company.
- The tax reporting requirements for companies are far greater than other structures.
- Shareholders have little say in the running of the company.
How to Report and Pay Income Tax as a Company
Your company must lodge an annual company tax return to report its income and deductions, and the
income tax is liable to pay. All companies pay their own income tax.
Your company pays tax on its net profit at a flat rate of 30%, which may be an advantage for companies with high profit levels.
If you receive wages or director's fees from your company, you need to:
- Include them in your individual tax return
- Pay tax on them at the individual's tax rates.
Paying Super as a Company
Your company must make super contributions for any eligible workers it employs, including you as a company director.
Trusts
Here's some insightful information when setting up a trust. If you operate your business as a trust, you are:
- A trustee
- Responsible for holding property or income for the benefit of others (the beneficiaries).
The most common variety of trust is the discretionary trust: As the trustee you have the power to
decide how the profit will be distributed among the beneficiaries.
Trusts Advantages
- A trust has a limited liability if the trust is a company.
- A trust has perpetual existence and does not cease with the death of a beneficiary.
- Increased asset protection.
Trusts Disadvantages
- Like a company, a trust is more expensive and potentially complicated to set up.
- More expensive to complete the required tax and administrative paperwork per year.
- Profits distributed to children under 18 may be taxed at higher rates.
Reporting and Paying Income Tax as a Trust
Your discretionary trust does not have to pay tax. Instead, the trust beneficiaries
pay tax on their share of the trust's net income.
As a trustee, you can use your discretion each year to decide which beneficiaries will
receive income. Trusts can pay very high tax rates on any profits that are not distributed.
Paying Super as a Trust
Your trust must make super contributions for any eligible workers it employs. This includes you if you're employed by the trust.
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