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BetterBusiness

What type of business do you have?

The business structure you choose can determine how much tax you pay, what you can do with your profits — even your personal liability if something goes wrong.


Most business owners choose to operate as a sole trader, partnership, company or trust. Each structure has pros and cons. There is more involved than just deciding between a partner or going it alone. Among other things, your business structure will affect:

  • Your set up costs.
  • Your ongoing paperwork and administration costs.
  • Distribution of profits to partners, family members and others.
  • The tax you pay, and your options for tax planning.
  • The ease of selling, changing ownership, or continuing the business when you leave.
  • Your personal exposure to debts and other liabilities.


The different business structures and their attributes are listed below:


Option 1: Sole trader

As a sole trader, you are the business. This is the simplest structure to set up and run. You don’t have to register a business name if you prefer to use your own.


Simplicity comes at the cost of some inflexibility, including tax planning. And you’re completely responsible for business liabilities like debts or employee claims. 
 

Pros

  • Very easy and inexpensive to set up.
  • You’re in complete control — and you keep all the profits.
  • Little red tape and paperwork.

Cons

  • You’re 100% responsible, financially liable, and it’s hard to take time off.
  • It can be harder to get finance.
  • It’s more difficult changing ownership when selling the business.

Tax matters

  • Business profits are treated as personal income, so you pay income tax on them using your own tax file number.

Setting up

  • Trade in your own name, or register a business name in each state where you'll trade. The cost varies in each state.
  • Register for an Australian Business Number (ABN) on the Australian Business Register, and register for GST if you'll turn over more than $70,000 a year. You can register for GST when you apply for your ABN.

Ongoing administration

  • Business Activity Statements (BAS) and personal income tax returns.


Option 2: Partnership

In a partnership, all partners own the business and its assets jointly and are equally responsible for debts. So even if you only own 10% of the partnership, you’re personally responsible for 100% of its debts (as are the other partners).The Partnership Act together with your partnership agreement governs your rights. 
 

Pros

  • Fairly easy and inexpensive to set up.
  • Easier to share responsibility and get finance with the resources of several partners.
  • Little ongoing red tape and paperwork.

Cons

  • You’re personally responsible for all the partnership’s liabilities.
  • Partners often disagree. You need to be confident you can work together, even when you don’t see eye to eye.
  • Changes of ownership can be difficult, depending on the partnership agreement and financial resources.

Tax matters

  • A partnership is not a legal “person” of its own and does not pay tax, but it does need to have a tax file number and lodge a return.
  • Business profits are distributed among the partners, who pay income tax on them.

Setting up

You need to:

  • Register your business name or trade under the partners’ names, register for an ABN on the Australian Business Register, and a tax file number, and register for GST if you turn over more than $70,000 a year.
  • You should generally also ask a lawyer to draw up a partnership agreement (which costs around $1,000).

Ongoing administration

  • Business Activity Statements (BAS) and partnership income tax returns.


Option 3: Company

A company is a separate legal “person” with a life of its own. That gives you an extra level of flexibility in managing your business affairs. It also reduces your personal responsibility for business debts and other liabilities.


In theory, your exposure is limited to the “paid up capital” of the company. This is the amount you and other shareholders have paid to own shares in it. But lawmakers are increasingly “tearing the corporate veil” to make company directors personally liable to a range of legal actions, while lenders will often ask you for a personal guarantee.
 

Pros

  • Reduced personal liability.
  • Flexibility in distributing profits to other shareholders, such as family members.
  • Easy to sell or pass on ownership.

Cons

  • More paperwork.
  • Higher compliance and set up costs.

Tax matters

  • The company is subject to company tax at a flat rate of 30%.
  • Profits can be reinvested in the company or paid out to the shareholders as dividends.
  • Dividends can come with “franking credits”, which are credits for the tax already paid by the company, reducing shareholders' tax.
  • The company can claim a tax deduction for directors’ wages and other salary costs.

Setting up

You need to:

  • Create a new company or buy a “shelf” company and register it with ASIC.
  • Register for an Australian Company Number (ACN), an ABN on the Australian Business Register, and a tax file number.
  • Register your business name and register for GST.
  • Total set up costs are around $1,500–$2,000.

Ongoing administration

  • Annual company returns, Business Activity Statements (BAS) and company tax returns.


Option 4: Trust

Typically the most complicated option, a trust is run by its trustee, for the benefit of the trust’s beneficiaries. The beneficiaries and trust rules are set out in the “trust deed”.
 

In a discretionary trust, the trustee has enormous flexibility in distributing each year’s income among the beneficiaries. So, although the trust usually pays no tax itself, it can give you significant tax planning opportunities. And because the trustee is personally liable for the trust’s debts, it can limit your liability — especially if the trustee is a company.
 

Pros

  • Reduced personal liability.
  • Flexibility in distributing profits to beneficiaries.
  • Easy to sell or pass on ownership.

Cons

  • More paperwork.
  • Higher compliance and set up costs.
  • Limited life (usually 99 years).

Tax matters

  • Each year’s profits are distributed to the beneficiaries, who pay tax. The trust generally does not pay tax (there are some exceptions).

Setting up

  • You need to register your business name, register an ABN on the Australian Business Register, and a tax file number, and register for GST if you turn over more than $70,000 a year.
  • You should generally also ask a lawyer to draw up a trust deed (which costs around $1,000).
  • Total costs: around $1,400, plus trustee set up costs (if a company).

Ongoing administration

  • Business Activity Statements (BAS) and partnership income tax returns.

 

 

 


  • Important information 
    As this advice has been prepared without considering your objectives, financial situation or needs, you should, before acting on the advice, consider its appropriateness to your circumstances. All products mentioned on this web page are issued by the Commonwealth Bank of Australia; view our Financial Services Guide (PDF 59kb).

 



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