Choosing the right business structure is a critical step when setting up a business.
Far too many businesses neglect to create a proper business structure, despite it impacting on how much you pay in taxes, the amount of paperwork your business is required to do, personal liability and how much freedom you have in running your business.
In Australia, there are four main types of business structures commonly used by businesses. It’s worth noting you are not locked into any structure and you can change the structure as your business evolves and grows.
A sole trader is an individual trading on their own and is considered the most simple and least expensive business structure.
A sole trader is legally responsible for every aspect of the business and is obligated to register a business name and obtain an ABN. Sole trader’s are also subject to the same tax rates as individuals.
A company is a legal entity that is separate from its shareholders and is able to do business in its own right. The words ‘Pty Ltd’, after a business name, indicate that it’s a registered legal entity trading in its own right.
It’s worth noting that the shareholders own the company and the directors run the company and profits are either shared out among the shareholders in the form of dividends or reinvested in the company.
A partnership is a group of individuals/entities running a business, but not as a company. An agreement is created that outlines several issues including salaries, drawings, profit share, loan agreements and termination clauses.
The partnership will need an ABN and its own tax file number and each partner will pay their share of tax on net partnership income.
A Trust isn’t an organisation, but instead a legal structure to hold assets. For example, you might set up a Trust to hold your business assets, then appoint a Trustee to manage them.
A trust is by far the most complicated business structure because there are multiple types of trusts and a bevy of ways they can be created and managed. Trusts, like partnerships, require an ABN and an independent tax file number.
Setting up a business structure is important not only for the immediate running of your organisation, but for the future of your business as well. By understanding the implications of each possible structure, you are setting a good foundation for the future of your business.
At BDH Leaders, we advise businesses of all shapes and sizes on the best structure for your situation.