Business Structures and Why They Matter
These are four main business structures you should know of to understand why they matter. Before setting up a business, you can look at other possible business structures as well. For that, do consult Numbers Talk and protect yourself from long-term problems.
If you want to be your own boss and don’t want to work under others, becoming an entrepreneur is right for you. However, you need to look at different angles of setting up a business in Australia. Besides a location, registration, business name, and other legal formalities, the most important thing you have to consider is the type of business structure you want to have. No matter which business structure you choose, you will need an accountant service for your small business in Melbourne.
Know that in Australia, small businesses are based on these four types of business structures:
- Sole Trader
- Partnership
- Company
- Trust
Remember, the type of business structures you choose will affect your tax, asset, and liabilities. Moreover, the cost of running the business as well complexity will rise if and when you decide to shift from one business structure to another. So consider the consequences of each one seriously, and understand what the details of each one are before you decide. Take a word of advice from our small business accountants Melbourne, CBD if you are confused.
- Sole Trader
You can set up a business under any name or have it registered under your own name. Since you will be the sole owner, any profit from the business will be your income, which will be liable for taxation at a rate fixed for individuals by the Australian Taxation Office. To be a sole trader, you have to get an Australian Business Number (ABN).
Pros
- Simplest and inexpensive business structure
- Fewer tax and legal formalities
- No need to follow employment rules and regulations are you alone are an employee and employer
Cons
- No chance to shift responsibilities to others
- You alone have to suffer business loss
- Difficult to finance your business
- Partnership
You will have to find a reliable person to start a business with under this structure. A partnership agreement which is possible with the help of small business accountants in Melbourne is necessary. The agreement will have the details of business nature, including sharing of loss and profit, monthly salary each partner will draw, rules of termination and admittance of new partners, and settlement of disputes. You can invest in business based on your capacity and share the profit so, which in turn would be taxed at individual rates.
Pros
- Shared control and responsibilities
- Equal liability of business incurs
- Flexibility to look at business from different perspectives
Cons
- Complicated and expensive business structure
- Lots of legal formalities
- Lack of understanding between partners affects business
- Company
Company is owned by shareholders and run by directors appointed by the Board of Management. Need to get a separate tax file number for the company as well as file its own income tax return. Further, all assets and liabilities will stay with the company and not shareholders or directors.
Pros
- Hassle-free transfer of ownership
- Fixed tax rate
- Strong potential to raise funds under the company’s name
Cons
- High regulations for running the business
- Dividends to be paid to shareholders from profit
- Directors have to give personal guarantees
- Trust
A Trust is an arrangement whereby you entrust the management and assets to a person or a company called a trustee. The trustee is responsible for the administration and operation of the trust and is responsible for earning profit for others called beneficiaries. A formal deed is necessary to form a Trust. In case you are appointing a company as the trustee, you have to register the trust with the Australian Securities and Investments Commission (ASIC) if the business is run under a new name.
Pros
- If a company is a trustee, asset protection is provided
- Distribution of income and asset is flexible
- Beneficiaries are exempted from the trust debts
Cons
- Administrative and management costs are higher
- Profit is not distributed, but losses are
Beneficiaries are liable for taxation from income received from the trust
