Starting a Business?

While there are a number of considerations when starting a business, ultimately you will need to decide which business structure should be used.

In Australia, there are a variety of structures available and depending on your needs, cashflow, risk and type of business, one will be most suited to you.

Each structure has its own features and benefits and it is not unusual for more complex situations to have  a mixture of structures.  A number of common business structures are explained, as follows:

Sole Trader
This is the most inexpensive and easiest structure to operate from.  It involves an individual carrying on a business or service, and being paid for it.  A Sole Trader simply invoices for their service and retains a profit from their sales.  The profit is then taxed in the hands of the Individual.

  1. Advantages – fast set up; low or no costs; can register a trading name.
  2. Disadvantages – greater risks to the individual; high profits means high tax.

Partnership
This involves more than one person forming a partnership, with a view of performing business activities.  A partnership can be structured as a 50/50 ownership or can split into equity of different proportions – say 60/40 or 50/25/25 (if there are 3 partners).  The profits are distributed as per the ratio of equity.

  1. Advantages – fast set up; low costs; can register a trading name.
  2. Disadvantages – greater risks to the partners; more profits equals higher tax.

Corporation (Company)
This involves an individual or a group of people incorporating their business into a company structure.  A private company is a common structure for individuals who would like a more formal arrangement with their business structure.  Companies are regulated by the Corporations Act, which provides more protection for the directors and shareholders.  The business owners are generally the directors of the company (meaning that they still get to make the decisions on behalf of the business) and the shareholders can be the business owners or any party wishing to invest money into the business.

  1. Advantages – more structured entity designed for a formal business arrangement; limited liability for directors (subject to ASIC and ATO rules); profits can be retained to manage tax liabilities; current maximum tax rate – 30%.
  2. Disadvantages – higher set up costs; more thought required to set the ownership and control dynamics. Note:  When purchasing a trading company, be aware that there may contingent liabilities against the entity (which may be difficult to find).  For example outstanding taxes (can be sourced through the Tax Office) or outstanding law suites (which are more difficult to determine).

Trusts
This involves setting up a trust to conduct business activities.  A trust is made up of: the Trust Deed, the Trustee and the Beneficiary.  The Trust Deed determines the rules of the trust; working outside these rules literally means ‘a breach of trust’.  The Trustees are responsible for knowing the rules of the trust and adhering to them.  The Trustee is typically the business owner, however it is not uncommon to have different trustees including a corporation as the trustee.  The beneficiaries are generally the business owners and/or their family.  There are a number of different trusts including Discretionary, Fixed, Hybrid and Superannuation.  For more information, contact our office or your Accountant.

  1. Advantages – A trust can provide greater asset protection; the ability to divert profits to a certain beneficiary (discretionary) or fixed distributions in the case of a fixed trust.
  2. Disadvantages – set up costs and complexity to ensure unit holdings and authority dynamics are understood.

Other Structures
This includes but not limited to public companies, special purpose companies and Joint Ventures.  These structures require specific advices from your legal and accounting team.  They have specific purposes and are very effective in particular instances.