Setting up a brand new small business enterprise can be an exciting and exhilarating time of your life, but it can also be extremely demanding and highly stressful.
There are key factors to consider when choosing a business structure, as these will influence your responsibilities, tax obligations, and future growth opportunities.
If you don’t make the right business decisions regarding your business structure correctly in the early days of being in operation, then it could lead to a troublesome experience correcting this incorrect choice, and lead to financial stress as you may need to appoint experts to help you!
There are a wide range of business structures out there, each with their own set of distinctive benefits and disadvantages. Sole traders, partners and franchising are some of the structures you will see. Other structures, such as unit trusts and partnerships of trusts, may also be considered depending on your business needs. It is important that you clearly know the differences between all the different types of business structures as it will almost certainly impact your tax obligations, but also may impact any plans to expand your business as it grows.
Introduction to Business Structures
When starting a small business, one of the most important decisions you’ll make is choosing the right business structure. The business structure you select will shape how your business operates, how much tax you pay, your legal obligations, and the level of personal liability you face. There are several types of business structures available in Australia, including sole trader, partnership, company, and trust business structures. Each structure has its own advantages and disadvantages, and the right choice depends on your business goals, the level of control you want, and how you plan to manage risk and growth. Understanding the key differences between these structures is essential for every small business owner looking to set up a solid foundation for their business operations.
Sole Trader
The simplest business structure is a sole trader business, which is the most straightforward way to operate as an individual. As a sole trader, you must register any business names you intend to trade under with ASIC to comply with legal requirements.
You will ultimately have personal ownership and control of your business assets and any decisions you may make. As a sole trader, you are legally responsible for all aspects of the business, including debts, taxation, and operational obligations.
You do have an unlimited personal liability though. This means that your personal assets would help you secure you a business loan, but your assets would be at risk should your business fail to meet its debt obligations to your loan provider. You can enter contracts in your name, and when conducting business under your registered business name, you must ensure you meet all compliance and regulatory requirements.
Partnership
Another very common business structure is a partnership, which is formed by two or more individuals. A partnership structure is a legal arrangement where two or more people share ownership, and it can take different forms, such as general partnerships and limited partnerships.
Contracts are made in the names of the business partners, with profits and losses divided by the proportionate share of capital contributions of each partner, and then they are aggregated for each individual partner with income for any other sources. In a limited partnership, there are general partners who manage the business and assume full liability, while limited partners contribute capital but do not participate in daily operations, with their liability restricted to their investment amount.
Be mindful that there are limitations on payments of salary made to family members. In the partnership, there is a personal assumption of any liabilities from the business in terms of debts, joint and severally by all individual partners. Business decisions in partnerships are typically made jointly by the partners.
Company Business Structure
A company business structure is a popular choice for many small businesses looking to limit personal liability and establish a more formal business presence. To set up a company in Australia, you must register with the Australian Securities and Investments Commission (ASIC). Once registered, the company becomes a separate legal entity, which means it can own assets, incur debt, and enter into contracts in its own name—distinct from its owners or company directors.
One of the main benefits of a company structure is the protection it offers to its owners. Because the company is a separate legal entity, your personal assets are generally protected from business debts and liabilities, reducing your personal liability if the business incurs debt or faces legal action. Companies are also subject to company tax rates, which are currently set at either 27.5% or 30%, depending on eligibility criteria. If your company’s annual turnover exceeds $75,000, you’ll also need to register for GST. While a company structure involves more regulatory requirements and ongoing compliance, it can be an excellent option for businesses planning to grow, raise capital, or operate with multiple shareholders.
Discretionary Family Trusts
Alternatively, you can operate your business through what is known as a discretionary family trust, which is a legal structure for operating a business. A trust involves a trustee holding property or income for the benefit of beneficiaries.
With a trust, business is conducted, and contracts are entered into in the name of the trustee, often a corporate trustee. A corporate trustee is commonly used for asset protection and to manage the legal responsibilities of the trust. You could be a director of this corporate entity as is standard for asset protection. Income can be distributed to all or some of the beneficiaries (who can be family members) to take advantage of tax implications. Family businesses often use discretionary family trusts to manage and protect family assets.
Unit trusts are another legal structure option for small businesses. Unlike discretionary trusts, unit trusts allocate income and assets based on fixed units held by beneficiaries rather than at the trustee’s discretion.
If you’re looking for a quick and simple loan solution to get yourself set-up with some extra funds to tackle the legal basics, talk to Unsecured Finance Australia about how we can help you meet your short term business loan needs.
Choosing the Right Business Structure
Selecting the right business structure is a crucial step that can have long-term implications for your business. When considering which structure to choose, think about factors such as the size and nature of your business, the number of business partners or owners, your desired level of control, and your appetite for risk. The business structure you choose will determine your legal relationship with the business, how business profits are distributed, and how much tax you pay.
It’s also important to consider asset protection, as some structures—like companies and trusts—offer greater protection for your personal assets than others, such as the sole trader structure or partnership business structure. If you plan to expand, raise capital, or bring in new business partners, a more flexible structure like a company or trust may be more suitable. Each type of business structure comes with its own set of legal obligations and compliance requirements, so it’s wise to seek advice from legal or financial professionals to ensure you’re making the best choice for your circumstances.
Business Name and Registration
Registering your business name is a key step in establishing your business identity and ensuring you comply with legal requirements. Your business name is how customers and clients will recognize your trading business, and it must be registered with the Australian Securities and Investments Commission (ASIC) if you are operating under a name other than your own. This process helps protect your brand and ensures that your business name is unique and not already in use by another entity.
In addition to registering your business name, you may need to apply for other business registrations, such as an Australian Business Number (ABN), Goods and Services Tax (GST) registration, and any relevant licenses or permits required for your type of business. Proper registration not only helps you meet your legal obligations but also builds trust with customers and suppliers, making it easier to conduct business and grow your operations.
Risk Management
Managing risk is an essential part of running a successful small business, and your choice of business structure plays a significant role in how much personal risk you take on. Some structures, like sole trader and partnership, expose you to unlimited liability, meaning you could be held personally liable for business debts and legal claims. In contrast, a company business structure or trust business structure can provide greater asset protection by separating your personal assets from your business liabilities.
To further protect yourself and your business, consider taking out appropriate insurance, keeping accurate financial records, and ensuring you comply with all legal and regulatory requirements. Regularly reviewing your business structure as your business grows can also help you manage risk and adapt to changing circumstances. By understanding the risks associated with each structure and taking proactive steps to mitigate them, you can safeguard your business and personal assets.
Conclusion
Choosing the right business structure is one of the most important decisions you’ll make as a small business owner. The structure you select will affect your legal obligations, tax responsibilities, personal liability, and ability to grow your business. Take the time to research the different types of business structures, consider your long-term goals, and seek advice from professionals if needed. By making an informed decision, you’ll set your business up for success and ensure you’re protected as you navigate the challenges and opportunities of running your own business. For further information and support, don’t hesitate to reach out to trusted advisors or consult official resources.
