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Business structures

There are a number of business structures to choose from when starting your business. It is important to choose the one that best suits your business needs, keeping in mind that there are advantages and disadvantages for each structure.

 

You can change your business structure at any time, such as when your business grows and expands.

Sole trader

A sole trader business structure is generally an individual trading on their own. Home-based businesses and independent contractors are often sole traders.

Advantages

A sole trader is a relatively simple and inexpensive structure to setup and run. The money you earn belongs to you as an individual. Reporting requirements are minimal and you report tax through your individual income tax return.

Disadvantages

There is unlimited liability, meaning you are personally at risk if anything goes wrong and your business and personal assets can be seized to recover debts.

What else do I need to know?

You do not need to have a separate bank account, but it is advisable.

A sole trader can hire employees.

Before deciding on a business structure, consider seeking professional advice from a business adviser, or a legal or accounting professional.

Independent contractor

Contractors and employees have different rights and obligations, so it's important to work out where your workers fit.

If you need help to work out whether you're a worker or someone who pays a worker, the independent contractors decision tool can help you understand what your working relationship is. 

If you want to work out what your working relationship is for taxation and superannuation purposes, you can use the ATO's Employee/contractor decision tool.

Company

A company is a separate legal entity. This means the company has the same rights as a person and can incur debt, sue and be sued.

There are a number of things to consider when deciding if the company structure will best suit your business needs. For example, you will need to decide on your governance arrangements, understand your legal obligations as a company director, and determine if you will be able to comply with the requirements of the Corporations Act 2001.

Advantages

Company owners are at less personal risk and are generally not liable for company debts.

Disadvantages

A company structure is complex, with higher setup and running costs. The money earned belongs to the company and cannot be used for personal purposes.

What else do I need to know?

You can have employees.

Before deciding on a business structure, consider seeking professional advice from a business adviser, or a legal or accounting professional.

Partnership

A partnership is a business structure than involves between two and 20 people who carry on a business together.

Advantages

A partnership is relatively easy and inexpensive to setup. You and each of your partners pay tax via your individual income tax, based on the share of the partnership income you each receive.

Disadvantages

You and your business partners are personally at risk if anything goes wrong. Assets can be seized to recover debts.

What else do I need to know?

A partnership tax return must be lodged each year with the ATO.

You can have employees.

Before deciding on a business structure, consider seeking professional advice from a business adviser, or a legal or accounting professional.

Trust

A trust is a business structure where the trustee conducts business for the benefit of the members of the trust.

Advantages

A trust structure, with a company as the trustee, can be a good option for family-run businesses as there can be tax advantages and flexibility in the way profits are distributed.

Disadvantages

It can be expensive to set-up and operate a trust. The legal and compliance requirements of a trust can be stricter and more complex than other business structures, including the company structure.

What else do I need to know?

A formal trust deed that outlines how the trust operates is required and the trustee must undertake formal yearly administrative tasks.

Before deciding on a business structure, consider seeking professional advice from a business adviser, or a legal or accounting professional.