Thinking about starting a business in Australia, it’s important you’re aware of the different business structures available. You will need to have decided on what business structure you will use when you register your company in Australia.
Each entity type has different requirements and benefits, so make sure your business aligns well with your chosen structure. As your business grows and its needs change, you can change your business structure, providing you comply with the government requirements.
Below, we’ll run you through the three most common types of business structures. We also include tax and legal information that will help you form a decision about which structure is best for your business.
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Business Structures in Australia – Sole Trader
This business structure allows for one individual, or a sole person and operates all aspects of the business.
Set up: This type of business structure is very simple and the least inexpensive to create, due to less reporting requirements. You need to apply for an Australia Business Number and use it for all business matters. You will also need to register your business name if it differs to your name.
Control: As a sole trader, you have full control and are able to make all the decisions about your business.
Liability: The key thing to note here is that a sole trader is legally responsible for the business and any debt or losses that arise from that business. This means your personal assets could be a risk if you fall into debt (unlimited liability).
Revenue: A sole trader can withdraw money from the business bank account as personal savings. In the event a sole trader does not have a business bank account, revenue will go into their own personal account.
Bank Account: You do not need to create a bank account (although this is recommended to make it easier to track business expenditure and income).
Tax: You use your individual Tax File Number (TFN) to lodge tax returns, so only one tax return is filled per year (combines individual and business). Tax is paid at the same rate as individuals taxpayers. If your annual turnover is more than AU $75,000, you need to register for Goods and Services Tax (GST).
Staff: Sole traders can’t hire themselves but they can hire other staff.
If you want to be your own boss and have complete control, a sole trader business entity suits you. Ultimately, you’ll be responsible for the business so you may need to reconsider this business structure as your business grows.
A company is a legal entity, separate from its shareholders. The company has the same rights as a natural person which means a company can incur debt, sue other individuals or entities, and be sued itself.
Set up: Companies must register with the Australian Securities and Investments Commission (ASIC). Directors must legally comply with the Corporations Act 2001. Cost of setting up and running a company is higher than the other business structures, as it is more complex and additional reporting standards. You need to register a business name if it differs to the company name you used when you registered the company.
For example, for a company name: Latin American Wine Exports Pty Ltd, your business name could be LatAm Wine Exports.
Control: Assigned directors control business operations, and the company is owned by shareholders (could be 2 people, could be 100). A company director has obligations to the company itself, its shareholders and any creditors. As various shareholders may own a company, control depends on the percentage of shares owned by a particular shareholder, which correspond to their shareholder voting rights. A company must have at least one director who is over 18 and resides in Australia.
Liability: Company owners, or shareholders, have limited liability. That is to say, they can’t lose their personal assets if a firm falls into debt of bankruptcy. There are exceptions to this rule for company directors if they breach their legal obligations. Corporations can be proprietary or public.
Proprietary limited company features:
- No more than than 50 non-employee shareholders
- At least one shareholder
- At least one director
Limited liability means shareholder liability is limited to the value of any unpaid shares (if any). In other words, they can’t lose more than they invested.
Public company features at least:
- one shareholder
- one secretary
- three directors.
Bank Account: A company must have its own business bank account.
Tax: You must file the annual company tax return with the Australian Taxation Office (ATO). Company directors, therefore, need to file a company tax return and a personal one. Companies must register for Goods and Services tax if their annual turnover is more than AU $75,000. You must also pay the company tax rate.
Revenue: Money earned by the company belongs to the company. The formal distribution of profits and wages is how money can be taken out of a company.
Staff: Can employ staff and are responsible for the provision of entitlements and conditions (e.g. annual leave, superannuation).
Due to the higher setup and maintenance costs, the corporate business structure suits medium to large-sized firms. Limited liability offers the firm’s shareholder protection of their personal assets. Corporations make it easier to obtain funding by selling shares of stock. This comes at the price of also give away more shareholder voting rights, resulting in less control.
A business structure that involves a number of people running a business together, but not as a company.
Setup: A relatively easy and inexpensive business structure to set up. You must apply for an Australian Business Number (ABN) and use it for all business conducted. This ABN is free. Written legal agreements between partners are also a good idea, to specify how losses and income will be split. You also need to register your company name, is it’s different to all the names of the partners.
Control: A partnership has at least two owners. You will share the control and management of the business will your business partners. You can run a partnership with up to 20 people.
Liability: As a partnership is not a separate legal entity, you and your business partners are liable for business losses.
If partners want to limit liability there is also a ‘Limited Partner’ structure. This requires at least one General partner and one Limited partner. General partners manage the day-to-day business and have unlimited liability. Limited partners don’t pay any role in the running of the business and their liability is limited to what they invested in the partnership. You must register your limited partnership in the relevant Australian state or territory.
Bank Account: For tax purposes, a partnership must have its own bank account.
Tax: Requires a separate Tax File Number. The partnership tax return needs to be filed with the Australian Tax Office each year. Income tax doesn’t apply to the income the partnership earns. Rather, each partner pays the individual tax rate on the share of the net partnership income that they receive. If annual turnover is more than AU$75,000 the partnership must register for Goods and Services Tax.
Revenue: Shared between partners. The proportion may be dictated in the legal partnership agreement, considering ownership shares.
Staff: Partners do not count as employees but are able to employ staff.
Partnerships are great for anyone that wants to go into business with friends or family, for example exporting products to Australia or opening a restaurant. It allows you to share profits and control with your partner. Be aware that you’ll be liable for the decisions your partner makes so a legal agreement is important.
Other taxes to note
- Business structures that employ staff will need to register with Pay As You Go (PAYG) to withhold tax amounts from employees income. This registration has no cost.
- Based on your business activities, you may be subject to specific such as Wine Equalisation Tax (WET) if you produce wine or Luxury Car Tax (LCT) if you import or sell luxury cars.
- If your business offers fringe benefits to employees, such as loans or company cars, you should register for Fringe Benefits Tax (FBT).
Interested in incorporating a company in Australia?
Ultimately, the business structure you choose to incorporate in Australia will depend on many factors. Set up costs and easy, amount of liability, taxation of profits and the ability to raise funding to help you to make your decision.
To learn more about the Australian economy, the business opportunities to form a company in Australia, and how you might take advantage of these political shifts, please contact us today.