Deciding on a business structure is one of the key decisions you will have to make when opening up a new business. The structure of a business depends on the size, type of business and growth. Each business structure has a different impact on the operations, taxes, liabilities, start-up and ongoing costs, your control, and legalities of the business.

Common types of business structures

The four most common types of business structures include the following:

• Sole trader
• Partnership
• Company
• Trust

Understanding the key differences between these structures is important.

What is a sole trader business structure?

The sole trader business structure is the simplest structure and means the business owner is legally responsible for every aspect of the business. This includes all debts and losses, as they are not shared with another entity.

What are the benefits of a sole trader?

• You have 100% control
• You keep all the profits
• Maximum privacy
• Operating the business is easy & simple
• Easy to change legal structures
• You can easily close the business
• Can file tax returns along with your individual TFN
• Less regulatory requirements
• What are the disadvantages of a sole trader?

The negatives of a sole trader business structure are that you are personally liable for all debts and business liabilities, which means your personal assets are also at risk. Another downfall is that you are not allowed to split business profits or losses with any family members.

You are also personally responsible for paying tax on all business generated income.

What is a company business structure?

The company business structure is a separate legal entity, meaning the directors of the company are not liable for the company’s debts.

A company can provide many tax benefits, however this business structure comes with high start-up costs and in-depth reporting requirements.

What are the benefits of a company structure?

• Limited liability – Directors and other shareholders can only be responsible for their share in the company. The company is a separate entity to the individuals.
• Company tax rate – The company tax rate is at 30% and 27.5% for the reduced rate, which is lower than personal tax rates.

Other benefits include:

• Excellent flexibility for expansion
• Supports multiple employees
• Government grants and incentives
• Unlimited lifespan
• Clear shareholder agreement
• What are the negatives of a company structure?
• Higher start-up & ongoing costs
• More obligations & governance requirements
• Rigid governance & reporting through ATO & ASIC
• No capital gains concession

What is a business partnership?

Business partnerships are a legal relationship formed in a written agreement between two or more people to invest their money, time and effort into a business.

A business partnership is a great way to run a business, as long as the partners ensure they are on the same page and have the same ideals and expectations.

Before entering into a partnership, it’s important to set out the obligations and requirements of the members in a partnership agreement. The agreement will clarify the roles of each partner and the dispute resolution process.

In Australia, there are three main partnership approaches:

• General partnership (GP) – All partners are equally responsible for the operations of the business. Each partner has unlimited liability for any debts and obligations of the business.
• Limited partnership (LP) – The partners have limited liability which is decided by the amount of money they invest into the business. Generally, limited partners are passive investors who do not decide on the management for the business.
• Incorporated Limited Partnership (ILP) – Partners can have limited liability for the business debts. Under an ILP however, at least one partner must be a general partner with unlimited liability. This means that the general partner is liable for the businesses shortfalls.

What are the benefits of a partnership?

The advantages of a partnership, as long as the partners share one vision include:

• Improved efficiency
• Less expensive than companies
• Quite a lot of flexibility
• Ability to change the structure later
• Partners share in the net profit

What are the negatives of a business partnership?

Business partnerships may have many benefits, but nothing comes without the disadvantages.

• Disagreement between partners is risky
• Partnerships are not a legal entity, meaning at least one partner has unlimited liability
• The actions of one partner can leave other partners liable

What is a trust business structure?

A trust is the obligation of a trustee (either person or company) to hold assets on behalf of the trust’s members, known as beneficiaries.

The trustee is legally responsible for trust and liable for the debts of the trust and will use its assets to meet any debts, however, the trustee is also responsible for shortfalls.

What’s the difference between discretionary and unit trust?

• Discretionary trust – The trustee has discretion in distributing the funds to each beneficiary. The trustee is flexible and can take personal circumstances and tax positions into account when considering the investment return to beneficiaries.
• Unit trust – A fixed trust, where the trustee holds the assets. The trustee divides the assets into fixed and measurable units, which are received by the unit holders. The investment return is distributed amongst unit holders based on their total number of units.

What are the benefits of a trust?

Under a trust your assets are protected, as the trustee legally owns assets. Which means if a beneficiary is sued or incurs debt, any litigators or creditors cannot repossess their property or income that’s held in the trust.

Other benefits include:

• Excellent tax planning
• Trusts aren’t taxed
• Trusts don’t have to be registered with ASIC
• 50% discount applies to disposals of assets held for 12 months of more
• Flexibility to distribute assets and income
• Passive income
• Estate planning

What are the disadvantages of a trust?

• Expensive to establish & administer
• Trusts are complex
• Difficult to dissolve or make changes
• Retained profits to reinvest into the business will incur tax
• Losses cannot be distributed
• If the trustee falls into trouble, the creditor may be able to claim against the beneficiaries
• No reduced tax rates like a company
• Since the trust doesn’t enjoy reduced tax rates and retained profits become taxed, which is why it’s important to effectively income split between beneficiaries to incur reduced tax.

Contact TY Lawyers for business structure help

Are you thinking about opening up a new business and need help deciding on the type of business structure that’s right for you? Or are you an existing business and need help deciding on a new business structure?

Speak to the experts at TY Lawyers as we can help you decide on the best business structure. Please call on (02) 8007 0135 or contact us online.