Choosing the right business structure is one of the most crucial decisions you’ll make when starting your business. Many factors must be considered when making this decision, such as your growth plan, business size, and circumstances. As a small or new business, you may change your structure further down the line to reflect business growth, but selecting a structure that best fits your business now is essential.
This guide will discuss each structure and its differences, providing a well-rounded outlook to help you make an educated decision.
Sole trader
As a sole trader, you’ll be responsible for taking care of everything in your business and when making pivotal business decisions. It is accurate to state that you’re self-employed, and although you can hire employees, you can’t have a business partner.
You are personally liable for your business, and it is your responsibility to sort out relevant registrations, such as your Australian Business Number and Goods and Services Tax (GST).
Factors to Consider For Sole Trader Ship
- If you use your own name as a business name, you won’t have to register for a business name. If you choose any other name, you must register with the Australian Securities and Investments Commission.
- Sole traders must declare their tax liabilities in their income tax returns. You’ll be taxed at the same rate as an individual.
- Personal services income can be earned when more than 50% of your income is through a contract that depends on your knowledge, skills, or efforts.
Partnership
A partnership is when two or more people join to run a business to make a profit. Setting up a partnership is similar to that of a sole trader, requiring minimal reporting.
However, a partnership is not an individual legal entity, meaning both partners are personally liable for any debts, resulting in no asset protection. While some prefer having shared responsibility, it is essential to be wary of potential disputes over control, profit sharing, and business direction.
Factors To Consider For Partnership
- You should have a legal partnership agreement ready that outlines your goals. It should define each partner’s financial contribution, the procedure for solving disputes, the procedure for ending or resigning from the partnership, and the role and level of authority.
- Each partner will pay tax on their share of the partnership’s net income, meaning the partnership doesn’t pay tax on its income.
- As a partnership, there are required registrations you must complete, such as; tax file number, PAYG, GST, and an Australian Business Number.
Company
A company works as an individual legal entity (unlike sole traders and partnerships) that can be sued, sue others or incur debt. The company owners, or the shareholders, can minimise their personal liability, which takes responsibility for company debts.
This business structure is more complex and comes with high reporting set-up costs; however, it can be seen as more professional with better tax efficiency. You can follow two types of company models: propriety (private) or public. A registered company should also have at least one director to manage the company’s affairs.
Factors to Consider For A Company
- A company is liable to taxes based on its profits or income calculated at the company tax rate. The tax has to be paid on every dollar earned. When running a company, you must know the ATO tax obligation requirements.
- A company also has to fulfil legal obligations. The board of directors is responsible for illustrating how they manage the company’s affairs and their role.
- You must register a business name, Australian Business Number, tax file number, PAYG and GST.
Struggling to Understand Which Structure Works for Your Business? We Can Help
While the above guide should give you an understanding of the three business structures, you may still feel conflicted about which structure to choose. Get in touch with YBM for business advisory services.