Which Business Structure Is Right For You?

by Ilyas Omari

April 5, 2022
Blog, SMEs

Want to know the differences between a Sole Trader, Partnership, Company and a Trust business structure?

We know that knowing the ins and outs of the right business structure can be overwhelming and if you don’t know where to start, you are not alone!

Choosing your business structure is one of the most important decisions you’ll make as a new business owner and that’s why it is crucial to know the different types of business structures available so you make the best decision for the needs of your business.

Read along!

What are the different types of business structures?

Ordinarily, there are three main types of business structures— Sole Trader, Partnership and Company. But, there is also the less commonly known business structure which is a Trust.

Each business structure has its advantages and disadvantages and as you read along you’ll discover more about how these structures can impact your business.

What is a Sole Trader (Sole Proprietor)?

A sole trader business is the most simple business structure. Sole trader businesses are operated by one individual. Sole traders have complete control and legal liability for their business. Most small business owners operate using this business structure.

How to form a Sole Proprietorship?

Forming a sole proprietorship is quite simple, and takes only a few steps:

First, you need to obtain an Australian Business Number (ABN)
Registering your business name is the second step in forming your sole proprietorship
As a third step in forming a sole proprietorship, you should apply for relevant permits and licenses
Opening a separate bank account for your business is not mandatory, but you should consider it
You should also consider getting insurance for your business, although this is not a mandatory step

What are the advantages and disadvantages of a sole trader business structure?

Advantages

Cost-effective and easy to set up
Full control over the business’s management and decision-making
You hold all of the business’s profits and assets
Your business is governed by fewer regulations
Business profits do not need to be disclosed to the public
Limited reporting requirements compared to other business structures
This business structure is easy to disband or sell
You can file a tax return using your own personal tax file number (TFN)
There is no requirement to open a separate bank account for your business. However, it’s a good idea to keep track of your business expenses and income

Disadvantages

Inflexible business structure
Unlimited liability, profits or losses made by the business cannot be split with family members. Due to unlimited liability, all your personal assets are at risk if there’s a problem
Your personal assets can be used to pay business debts since there’s no distinction between business and personal assets
Capital is difficult to raise in this business structure because your business can’t raise capital simply by issuing shares as a company could. Essentially, the only capital you can raise is either through debt that you can raise from friends or family or through a business loan that you can apply for from your bank
A lack of business partners
The business structure is rigid therefore it will not accommodate an expanding business
There are no tax benefits

What is a Partnership?

A general partnership business structure is between two or more people who operate the business together. They equally share the business’s income and losses. Partners act on behalf of their partners therefore partners are liable for the actions of their partners.

Alternatively, a limited partnership structure is available where one or more partners are limited in their liability for the debts and obligations of the business. Limited partnerships require one limited partner and one general partner.

How to form a partnership?

Several important steps must be taken to form a partnership.

The first step is to choose your business partner or partners.
Creating your partnership agreement is next. Partnership agreements outline how partners plan to operate and manage the business together. We recommend that the agreement is written down.

Registering your partnership is the next step in setting up. To do this:
– You first need to register for an (ABN) with the Australian Business Register.
– You must then get your business name registered with the Australian Securities and Investment Commission (ASIC).
– This will not be necessary, however, if you plan to trade under the partners’ names (e.g. L Jones & K Jones)

Your partnership should then be registered with the appropriate tax authorities. This may involve a tax file number, the need to register for GST if your partnership makes over $75,000 in annual revenue and if you’re planning on having employees, you should also consider pay as you go (PAYG) withholding.
Then, you should make sure your partnership has a bank account.
Last but not least, you’ll need the appropriate licences to operate your business. Depending on the type of business you have, different licenses and registrations will be required.

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What are the advantages and disadvantages of a partnership business structure

Advantages

Partnerships are governed by a partnership agreement that is easy to administer
Several people’s expertise and resources are combined
Does not need to disclose any profits to the public
Cheap registration and it’s easy to set up
Capital raising is easy
This business structure is easy to disband or sell
Reporting requirements are minimal
This business structure obtains benefits from taxation.

Disadvantages

Personal liability means that you’re responsible for all of the debts and taxes of your business. Since there is no distinction between business and personal assets, your personal assets can be used to pay business debts
Shared responsibility for the actions and mistakes of other partners
You’ll be taking joint responsibility for the business’s debts
It’s difficult to change business structures
Each year, partnership tax returns must be filed with the Australian Taxation Office (ATO)
Partners are required to take responsibility for their own superannuation arrangements
If your turnover is $75,000 or more annually, you must register for GST
Separate tax file numbers (TFNs) must be provided
Your business must have an Australian Business Number (ABN) to use for all business transactions

What is a Company?

A company is a corporate structure where you can create a separate legal entity. Therefore the company is its own legal person, separate from all its shareholders and officers. Due to Companies having their own legal personality they are able to sue, be sued and owe debts.

Companies are incorporated under the Corporations Act 2001 (Cth) and are governed by the Australian Securities and Investments Commission (ASIC).

How to form a company?

To begin, you need to decide if you’re going to use a service provider or set up the company yourself
Secondly, you must choose a name for your company. You need to ensure the name of your company shows your legal status. For example, ABC limited liability company (LLC)
You have to establish the rules that will govern the company
The company’s shareholders and directors need to be decided
Following the selection of shareholders, you must determine how many shares each shareholder will own and the type of shares they will own
Register your company in your preferred state or territory
Then select the location of your registered office and primary business
Lastly, you must complete the necessary paperwork and register your company yourself or through a service provider

What are the advantages and disadvantages of a company business structure?

Advantages

Companies are separate legal entities. A separate legal entity means a company exists separately from everyone involved or associated with it, including its owners and employees. Essentially, this works to protect you and your finances in the event of legal action taken against your company. Companies have their own assets, obligations and rights
Shareholders are not liable for the company’s debts
Companies can enter into contracts as themselves
A company can trade anywhere in Australia and has a lower tax rate than the highest tax bracket for individuals
This business structure is ideal for businesses looking to expand and scale
The company has its own legal personality. As a result, generally, shareholder obligations are limited to the unpaid amount on their shares (which is usually zero)
Due to limited liability, this business structure is most suited for businesses with high risks
Due to the company having its own legal entity, shareholders and members of a company are generally not personally liable for company debts given their limited liability
For startup businesses, a company structure is desired due to its ability to raise capital easily and grow through the issuance of shares
Companies are sold or dissolved easily
Companies enjoy advantages from tax
It has wider access to capital

Disadvantages

Setting up a company is difficult and expensive
Companies require a lot of administrative work compared to other business structures
Registration fees are high
It’s difficult to change business structures
Ongoing costs and set-up costs are higher for this type of business structure
The Australian Taxation Office (ATO) requires the annual filing of a company tax return
An annual review must be completed and a fee must be paid
A declaration of solvency is required of company directors annually
A Director Identification Number is required of all company directors
Tax and legal obligations must be met by companies
Your company must register for GST if it turns over $75,000 or more annually Non-profit organisations must register for GST if their turnover is $150,000 annually
ASIC must be updated within 28 days of any significant changes to company information
Financial records must be kept
As a director, you are responsible for knowing and complying with all your obligations outlined in the Corporations Act 2001

What is a Trust?

The less common business structure is known as a Trust. In this structure, a trustee can either be a company or an individual who holds the business for the beneficiaries’ advantage.

The trustee has full control and legal responsibility for the trust and its operation, including its losses and profit.

How to form a trust

There are a few steps to forming a Trust.

Firstly, you need to choose a trustee
Then a trust deed should be written
A settlor should settle the trust
Any stamp duty that applies must be paid

What are the advantages and disadvantages of a trust business structure?

Advantages

Limited liability means due to the company having its own legal entity member or shareholder liability is limited, and they’re generally not personally liable for the company’s debts
Raising capital is easy. Whenever a company asks its investors for additional funds, this is called capital raising
Tax benefits. The primary tax advantage of this legal structure is that trustees can distribute income, such as capital gains, from investments and business activities to beneficiaries in lower tax brackets (typically children or spouses)
Asset protection. Assets are anything a company or individual owns that has economic value and is redeemable with cash is considered an asset

Disadvantages

Expensive registration compared to other business structures
Hard to set up
Changing or dissolving from this business structure once established can be difficult
Formal trust deeds describing the trust’s operation are required for this type of business structure
Trustees are required to perform formal administrative duties on a yearly basis
This legal structure is complicated
Its operations are legally the responsibility of the Trustee

Now that you are familiar with the different business structures available and their advantages and disadvantages, you can select the business structure that best suits you!

Key Takeaways

Choosing your business structure is one of the most crucial decisions you will have to make as a new business owner. You’re not alone if you aren’t sure where to start.

At Lawpath, we make this decision easy for you whether you choose to be a sole trader, have a partnership, form a company or trust. If you have decided on what business structure is right for you, your next step may be to register your company . Lawpath offers different options to take this step.