Business Structures
Summary
Common business structures
It is important to consider the advantages and disadvantages of different business structures.
Sole Proprietorship (sole trader): A person trading as the individual legally responsible for all aspects of the business.
- Advantages: Easiest to set up, establishing a sole proprietorship is usually free, flexible to change to a different structure in the future.
- Disadvantages: Owner is personally liable for business costs and debts, may not be tax effective when the business makes significant profits.
- How to set-up: Register for an Australian Business Number (ABN) that links with your personal Tax File Number (TFN).
Partnership: involves a number of people (at least 2) who carry on a business together.
- Advantages: easy to set up, minimal cost to operate (a separate tax return is, however, required), may be more tax effective than a sole proprietorship because profits are shared.
- Disadvantages: unlimited liabilities for all partners, potential conflicts due to joint decision-making, may be complicated to add or change partners in a partnership.
- How to set-up: apply for a TFN for the partnership and register an ABN that links with the partnership’s TFN.
Private Company: Legal entity is separate from its shareholders; a private company is also called a proprietary limited company (abbreviated as 'Pty Ltd').
- Advantages: limited liabilities for shareholders (with exceptions), easy to transfer ownership, may be most tax effective compared with sole proprietorship and partnership, can raise capital through borrowing or equity investment as a separate legal entity.
- Disadvantages: cost more to establish and operate, subject to ASIC regulations and Corporations Act, usually requires professional assistance from an accountant to ensure compliance, employer obligations may arise even if only owners are working in the business.
- How to set-up: Register a company with Australian Securities and Investments Commission (ASIC) and obtain an Australian Company Number (ACN) from ASIC; then register a TFN and an ABN that link with the company’s ACN.
Other business structures
In addition to sole proprietorship, partnership and private company structures, other less common business structures may also be considered:
- Discretionary Trust. A discretionary trust is also called a family trust. Such a structure may be used to distribute profits from the business to family members (limitations apply). For more information, visit ATO website or consult a qualified accountant or tax agent.
- Unit Trust. A unit trust is also called a fixed trust. Such a structure may be used to distribute profits from the business to multiple investors who hold fixed interests in the business. For more information, visit ATO website or consult a qualified accountant or tax agent.
- Incorporated Association. An incorporated association is usually a not-for-profit entity subject to relevant laws in the state or territory of incorporation. Generally, an incorporated association cannot distribute its surplus (or profit) to members. For more information about incorporating in New South Wales, visit NSW Fair Trading website.
- Co-operative. A co-operative (co-op) is owned and controlled by its members. Generally, a co-op must have at least 5 members who have equal voting powers. Unlike an incorporated association, a co-op can distribute a part of its surplus (or profit) to members. For more information about registering a co-operative in New South Wales, visit NSW Fair Trading website.
- Indigenous Corporation. An indigenous corporation can be a suitable structure for Aboriginal and Torres Strait Islander organisations (usually not-for-profit). For more information, visit Office of the Registrar of Indigenous Corporations website.
The business structure may determine a range of obligations including, but not limited to:
- Tax liabilities
- General responsibilities as a business owner
- Personal liability
- Protection of assets
- Amount of administration work required
- Various ongoing costs
How to change a company business structure
Steps on how to change your business structure are detailed in the Business Structures handbook.
