Structuring a Business in Australia

Choosing a business structure that’s right for you 

Each business structure serves a different purpose. Your choice of structure will depend on the size and type of business, your personal circumstances and how much you plan to grow the business.

Sole traders

When you run a business as a sole trader, you record the business’s income and expenses in your personal tax return. It is a good option from a tax perspective because if it takes time to get your business going, any tax losses can usually be applied at the individual level against all other forms of assessable income, including salary and wages and income from other business activities.

One of the main disadvantages with this type of business structure is that setting up as a sole trader does not provide you with any form of asset protection from creditors or protection in the event of family break-ups.

Partnerships

A partnership is a group of people carrying on a business together and sharing the business’ income and losses. Partners are liable for the business’ debts and liabilities. They are also legally responsible for the actions and debts of the other partners.

Similar to sole traders, partnerships are cheap and simple to set up. A partnership does not pay tax on its business income. Instead, the partners share the business income. 

Discretionary trust

Business structures which set up trusts are common. Trusts are perceived to hold tax advantage.

For example, one of the major advantage of using a discretionary trust to run your business is that you are able to decide who benefits from the income of the trust. Once you start trading profitably, the trust will be able to distribute its income in the most tax effective way.

However it’s worth highlighting that it’s not possible for you to offset current tax losses to even out any previous taxable incomes.

A trust is not a legal entity it is only a concept, or a set of obligations. So while a trust cannot be sued, liquidated or made bankrupt, the trustee certainly can. Once a trustee becomes insolvent, any number of difficulties and new sets of challenges can arise.

Company

Finally, a company is a separate legal entity to the people who run it. One of the main reasons people choose a company structure is that it provides limited liability to the shareholders. There are also asset protection benefits with this type of structure because creditors of the company cannot access the assets of the shareholders.

The downside is that company profits are taxed at the company tax rate: 30% for larger companies and 27.5% for companies with a turnover of less than $25 million.  A company is also responsible for withholding income tax from employees’ wages and paying them through PAYG instalments.

Where to from here?

Starting a new small business has an impact on your tax requirements because it means you will earn and potentially spend money in different ways to someone who is simply an employee. 

Make sure you consider all of your options before you get started – and seek professional advice if you have any questions.

If you have questions about the tax implications of your business structure, get in touch with the best lawyers in Brisbane.

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