Australian business structures and types

Key points in this article

  • Setting up as a sole trader
  • Creating a company
  • Running a partnership

Choosing a business structure

There are four main business structures used by small businesses in Australia:

  • sole trader
  • company
  • partnership
  • trust.

Each has its own tax implications, advantages and disadvantages, and potential impact on how you run your business.

Sole trader

If you set up your business as a sole trader, you will be the sole person responsible for the business. You alone will own the business – with full control over all business decisions and assets.

You don’t have to operate on your own, however, as you can employ staff. Should you hire employees, you will be responsible for fulfilling all compulsory requirements such as:

  • paying payroll tax
  • obtaining worker’s compensation insurance.

As a sole trader, your business income will be reported using your individual Tax File Number on your personal tax returns.

As a sole trader, there are few reporting requirements and minimal costs associated with setting up the business as a sole trader.

Perhaps the biggest disadvantage of this business structure is its personal liability component. This means that you can be held personally liable for your business’s debts and liabilities. If something goes wrong, your personal assets could be seized.

Take responsibility and set up with minimal costs as a sole trader 

Company

A company is a separate legal entity. It’s run by directors and owned by shareholders. Companies need to be registered with the Australian Securities and Investments Commission (ASIC).

The Corporations Act 2001 spells out numerous legal obligations that all company officers and directors must understand and comply with.

This business structure is more complex, with higher setup and operating costs than the other structures. As a shareholder, you’ll have less control over the company, with the directors assuming control over business operations.

Because the company is its own legal entity, its income, tax obligations, debts, and liabilities are considered its own. The company will need to file annual company tax returns. Any salary or dividends you receive will be taxed separately on your personal income tax returns.

This structure shields you from liability compared to the other structures, but you could still be held accountable for the company’s liabilities. For example, company directors are often asked for personal guarantees, negating the liability protections built into this structure.

A more complex structure with higher operating and setup costs is the company

Partnership

A partnership is a business structure run by a group of people – the partners. These partners:

  • run the business
  • share control
  • divide the profits.

A partnership is not the same as a company. In fact, a partnership is more like a sole trader, only there are from two to twenty people who own the business.

A partnership is not a separate entity, and all partners are personally liable for the business’s debts. Like a sole trader, the partners each pay tax on the business income they receive, filing it on their personal tax returns.

Though your partnership doesn’t pay income taxes, it must file a partnership tax return with the Australian Tax Office each year. You will also need to get a separate Tax File Number for your partnership.

Like a sole trader, this business structure is fairly easy and affordable to set up. Both general and limited partnerships are available.

Run by a group of people, a partnership is a shared business

Trust

Less common, a trust is a structure operated by trustees for the benefit of the trust’s beneficiaries.

Trusts are expensive to set up, typically requiring the help of a trust attorney. They’re generally used to maintain an estate for a beneficiary until he or she comes of age and can legally possess it. Trusts are also commonly used to protect assets from creditors.Top of Form

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