If you’re thinking about starting a business, it is vital to give sound thought to the type of legal structure you need. To better understand the differences between each business structure, we have briefly summarised some options below. Sole Trader Starting with the simplest form of business structures, operating as a sole trader is the most inexpensive structure to establish. This structure allows you to trade under your own name use your own personal Tax File Number, pay tax at the individual income rate with minimal reporting requirements.
A partnership is a relatively simple and inexpensive structure to set up, whereby control and management of the business is shared between the partners. It requires its own Tax File Number and if carrying on an enterprise the partnership can apply for an ABN. It is not a separate entity; the partners are personally liable for the debts of the business. Each partner pays tax on their share of the net partnership income they receive. A partnership must be registered for GST if the annual income is $75,000 or more.
A company is a distinct legal and tax entity. It may sue or be sued in its own right. Companies are owned by the shareholders and run by directors. Several advantages arise with a company structure, including income being taxed at 30%, limited personal liability and shareholders can receive a credit after the company has paid tax.
A trust is a structure whereby a trustee will be responsible for your business management on behalf of the trust beneficiaries. A trustee may be a company or an individual. A trust exists based on a legal relationship between the trustee and beneficiaries. The trustee holds and manages the trust assets and runs the business in a particular manner for the benefit of the beneficiaries of the trust.
Depending on how the trust is structured (there are many types) if a potential beneficiary encounters financial problems, a trust can be an instrument for asset protection from creditors. Additionally, a trust structure can provide the ability to direct income to low tax payers and therefore providing tax benefits.
It is best to consider all options before deciding to undertake a business operation and legal advice is recommended.
By Michaela Schmidt