Your Guide to Australian Business Structures

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SINESS STRUCTURES In Australia, there are three commonly used structures in business today.

1. Sole Trader

2. Company

3. Partnership

This article will focus on these key business structures, but other structures available include:

Trusts, Unincorporated, Co-operative and Joint Ventures

“If the shoe fits”

The structure you choose for your business should fit comfortably, like a good pair of shoes. An incorrect choice of business structure can prove costly in the medium to long term and may lead to tax inefficiencies.

In deciding what structure to choose, consideration should be given to taxation, type and size of business, finance requirements and establishment costs.

Sole trader

This is the simplest and most inexpensive form of business structure to set up. As a sole trader you trade under your own name or a business name, and it gives you, the owner, all the decision-making power. If the business operates under a name other than that of the owner, that name must be registered under the Business Names Registration Act 2011 (Cth). Business names are administered by the Australian Securities and Investments Commission (ASIC). (visit www.asic.gov.au to register a business name)

From a tax perspective, sole traders will obtain an ABN for the business and apply for tax registration such as GST & PAYG. A sole trader is required to include the income & expense of their business operation in their personal income tax return and be assessed as an individual income taxpayer.

Proprietary Limited Company (PTY LTD)

A private company has members (shareholders) who own the company, and directors who run it. If you are an independent operator you can set up a 'one-person company' with a sole director and member.

Private companies are regulated under the Corporations Act which sets out numerous obligations for company directors. There are initial establishment costs and followed by ongoing administrative costs associated with operating a private company. This is why this structure is generally considered to be better suited to medium to large businesses.

From a tax perspective, the company is its own legal entity and therefore obtains its own TFN & ABN, registers for GST, PAYG etc. lodges an annual company tax return and is assessed as a company taxpayer in accordance with the company tax rate.

Partnership

A partnership is a structure that has a minimum of two and maximum of twenty people choosing to go into business together. Partnerships can be either general or limited, depending on the liability of the partners.

A partnership agreement is executed in accordance with the relevant partnership law.

From a tax perspective, the partnership will obtain its own ABN & TFN and lodge its own tax return. However, the partnership does not pay income tax. Therefore, partnership taxable profits are divided between the partners, as set out in the partnership agreement, and each partner then includes their share of the taxable profit (or loss) in their income tax return for assessment by the ATO.

At a glance, below are some of the pros and cons of the three primary business structures:

	Pty Ltd company	Sole Trader	Partnership
How decisions are made	The Corporations Act (the Act) provides that the majority of decisions will be made on behalf of a company by the directors.	There are no such restrictions for sole traders. Owner makes all decisions about the business.	Generally, all partners participate in the management of the partnership and decision-making process.
Liability	One of the MAIN advantages of operating a pty limited company is the restriction regarding liability. Directors & Shareholders: for the most part, if a company goes into debt, creditors cannot recover any debt from directors or shareholders, unless they have given the green light for the company to continue trading after insolvency.	The liability of sole traders is not limited. Loans provided to sole traders will generally be secured by their personal assets – which include personal investments and property assets.	Partnerships may have their own ABN and TFN, but they are not separate legal entities. Partners have unlimited personal legal responsibility for the debts and liabilities of the partnership business
Security for finance	Any loans provided to companies can only be secured by company assets, however in certain circumstances; directors may be requested to provide personal guarantees.	Loans provided to sole traders will generally be secured by their personal assets, which include personal investments and property assets.	Loans provided to a partnership will generally be secured by the partnership assets and in some cases, the personal assets of the partners
Investment and capital raising	Companies are able to procure investment from outside parties by offering shares.	Sole traders are not able to offer shares. To add capital, they must seek financing from lenders and banks.	Partners are able to procure investment or capital from existing partners or new additional partners.
Start-up costs	There are costs associated with registering a company with ASIC, applying for an ABN, TFN and other ATO registrations. There may also be costs for legal advice for officeholders and costs associated with licences. Shareholders cannot claim their investments in a company as a deduction against their assessable income.	Sole traders can claim expenses used in setting up their business as a deduction against their assessable income.	Partners cannot claim their investments in a company as a deduction against their assessable income.
Income tax	Companies pay tax at the corporate rate. Depending on the business size, company tax is either 25% or 30%.	Sole traders pay tax depending on their personal marginal rate. This is because income derived through a business operated by a sole trader, is considered as the sole trader's main assessable income.	Partnerships do pay income tax. Partnership taxable income is divided between the partners, as set out in the partnership agreement, and each partner then includes their share of the taxable income in their respective income tax return
Retained profits	Companies are generally not required to issue profits (in the form of dividends) to shareholders and can use the profits to facilitate growth in the business.	Profits of sole traders will be taxed at their personal marginal rate; furthermore, sole traders cannot retain any profits.	Partnership profits may be retained in the business for cashflow however partnership taxable income must be distributed to each partner.
Tax losses	Companies that have multiple businesses can offset any losses from one of the entities against the income of the other. For companies that form part of the same consolidated tax group, the situation is similar, in that losses can be offset against the other sources of income in the submission of a group’s return.	Sole traders have the ability to offset any losses from one source of assessable income to another. For example, any losses incurred in regard to rental property can be offset against any income from the business of the sole trader.	Partnership taxable losses can be carried forward and applied against future taxable profits
Carried forward losses	Taking into account any special ownership and business continuity rules, a company can carry any tax losses to future years.	Sole traders can carry tax losses to future years.	Partnership taxable losses can be carried forward and applied against future taxable profits.
Consumer protection	The Competition and Consumer Act 2010 (Cth) protects consumers whenever they are dealing with a company.	Consumers are protected when dealing with state based sole traders by various legislative instruments, such as the Fair Trading Act.	Consumers are protected when dealing with state based partnership businesses by various legislative instruments, such as the Fair Trading Act.
Registration fees	There are a number of costs associated with a company, including an ASIC registration fee and an ASIC annual review fee. If the company is to engage in certain types of activities, then the company must pay licence fees (e.g. a liquor licence) and such fees are often more expensive for a company than for a sole trader.	There is no registration or annual fees for sole traders other than for a registered business name. Business licensing fees are often lower for sole traders than for companies.	The main cost for a partnership is the legal costs for a partnership agreement.
Creditors & Insolvency	The Act outlines the rights of creditors in the event that a company becomes insolvent.	The rights of creditors of sole traders who become insolvent are contained within the Bankruptcy Act 1996 (Cth) (and associated legislation).	Creditors of the partnership are entitled to payment from the assets of the partnership. If the partnership assets are insufficient to meet the debts, the partners are jointly liable for
Regulations	Companies are regulated by the Act and governed by a constitution.	There is no equivalent legislation regulating sole traders.	The relevant legislation which governs partnerships is the Partnership Act 1895 (“Act”).

To help you navigate through these business structures and find the best solution for your needs, contact Jack Sciara Tax for a consultation today.

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Disclaimer: Readers should not act solely on the basis of the material contained in this article. The information provided herein is a helpful guide only and does not constitute or convey advice per se. Furthermore, changes in income tax legislation may occur quickly. It is always recommended that readers seek professional and formal taxation and financial advice before acting in any of the matters discussed in this information sheet.