Choosing a business structure

A sole trader business is a simple structure where 1 individual decides to start and run their own business—this individual is known as the sole trader.

Sole traders are legally responsible for all aspects of their business, including debts, invoicing, taxation and business operations.

Advantages

• Inexpensive, simple to set up and easy to maintain
• Greater privacy than other types of structures—sole traders do not have to disclose their profits to the public
• Simple ownership and taxation considerations—you personally own the business profits and assets. Profits are taxed at your personal income tax rate

Disadvantages

• Personal liability for all business debts in their entirety—in some cases, you can risk losing personal assets if your business fails
• Few tax concessions are available—tax is paid at your marginal tax rate (this may be higher than a company rate)
• Limited expansion opportunities

Examples of businesses that suit a sole trader structure

A sole trader businesses structure may suit:

• self-employed owners of new small businesses (e.g. trade person, consultant, massage therapist)
• a small franchisee where the start-up business wants to benefit from an established business model and brand (e.g. mowing franchise)
• independent contractors who have left employment and want the flexibility of conducting business with one or more employers (e.g. an IT professional or tradesperson).

A partnership is a business structure made up of 2 or more individuals.

In a partnership, the business decisions, income and losses are distributed between the partners.

Partnerships are governed by the Partnership Act 1891. This legislation sets out the rules and obligations for the partners, including a joint liability on all business debts.

Advantages

• Less expensive to set up than a company
• Simple to administer with profits and losses shared between the partners
• Can combine resources and expertise of different people
• Greater privacy than other types of structures—partnerships do not have to disclose their profits to the public

Disadvantages

• All partners are personally responsible for the business debts
• Tax charged at the personal tax rate—as business earnings increase, so will the tax rate
• Ownership can’t be transferred unless all partners agree
• Differences between partners can interfere with business operations

Examples of businesses that suit a partnership structure

A partnership business structure may suit 2 or more people wanting to work together to start a business who are prepared to pool their resources and skills, and share the profits, tax obligations and risks (e.g. professional services).

A limited partnership is a structure where 2 or more individuals form a partnership with a minimum of 1 general partner and 1 limited partner.

A general partner is the individual who runs the daily business operations. In some cases, they may have unlimited liability, meaning that they are personally liable for all business debts and must pay if the business itself does not have enough cash or business assets to cover them.

Limited partners do not participate in the running business—they are only liable for the amount of their investment.

Read about registering a limited partnership.

Advantages

• Common investment structure to use when an investment partner is not involved in general management
• Can vary the liability between partners
• Ability to combine resources and expertise of different people
• Greater privacy than other types of structures—partnerships do not have to disclose their profits to the public.

Disadvantages

• Only general partners can run the business
• Limited partners are only liable up to their investment
• More expensive than registering as a company
• Partners can’t transfer ownership unless all partners agree
• Personal differences between partners can interfere with business operations.

Examples of businesses that suit a limited partnership structure

A limited partnership structure may suit people wanting to fund a business without having to participate in the daily operations (e.g. a parent assisting a child who is a young adult to start a business; a business investor wanting to invest in an entrepreneur).

A company business structure is an independent legal entity established by company directors and owned by shareholders.

A company can incur debt, sue and be sued. Company directors may be held personally liable if found to be in breach of their legal obligations.

All companies in Australia must be registered under Australian corporations law and are governed by the Corporations Act 2001.

Get more information about forming a company from Australian Securities and Investments Commission (ASIC).

Advantages

• Shareholders typically only lose the value of their shares if the company fails
• Legal arrangements are in the company's name, not the director’s
• Shares may be transferred to others
• Low tax rates (the tax rate for companies is less than the highest rate for individuals)

Disadvantages

• More regulated than other business structures
• Less private than other structures—in some cases, companies must disclose their profits to the public
• More complex and costly for establishment and operation
• May require personal guarantees from directors or shareholders (e.g. for investment)
• Directors can be held personally liable for debts if they fail to meet their legal obligations
• Shareholder profits are taxed

Examples of businesses that suit a company business structure

A company business structure may suit any business where there are up to 50 shareholders and one or more directors who manage and run the business (e.g. energy, information and technology, arts and entertainment and education).

A trust business structure is a legal relationship between 2 or more individuals.

In this structure, a trustee (an individual or a company) carries out business for the benefit of other people (the beneficiaries).

The trustee is responsible for all the business operations, including income and losses.

Advantages

• Asset protection and limits liability for the business
• Useful for protecting the income or assets of a young person or family—trusts separate the control of an asset from the ownership of the asset
• Control of assets separated from the owner
• Beneficiaries are generally not liable for the trust debts
• Beneficiaries pay tax on income at their own marginal rates

Disadvantages

• Significant costs for establishment (more than sole traders and partnerships)
• Complex legal structures that require professional advice to create
• Strict obligations and extensive regulations for the trustee
• Any losses derived cannot be distributed or offset by beneficiaries
• Profits cannot be kept for expansion without having to pay penalty tax rates

Examples of businesses that might suit a trust business structure

A trust business structure may suit family businesses where the family members are comfortable having a trustee distributing the capital or income to each family member (e.g. family-run retail store).

Social enterprises exist to benefit the public, community and environment.

Social enterprises can be set up as any legal structure (e.g. company, partnership, cooperative organisation, incorporated association).

Where set up as an incorporated association, the enterprise will have members (a group of individuals) and a governing body (a separate legal entity).

Social enterprises can be for profit, not-for-profit or a hybrid. In some cases, profits of the business will not be distributed to the members but are reinvested into the activities designed to achieve the purpose of the social enterprise.

Advantages

• Flexibility in legal structure (e.g. a social enterprise might be set up as a company, partnership, incorporated association or cooperative organisation)
• Can be set up as for profit, not-for-profit or as a hybrid
• Extra support is available (e.g. government loans or assistance from private investors backing your cause)
• Increased sense of reward for owners and employers that comes from the social, community or environmental mission
• Ease of marketing and brand identity matched to social mission of the business

Disadvantages

• If set up as an incorporated association or a company limited by guarantee, members will not receive a distribution of the profits

Examples of businesses that might suit a social enterprise structure

A social enterprise may suit a business with a social, environmental, cultural or political mission (e.g. organic farm and café, micro-lending business, community-based organisation).

Watch our Social enterprise: Business with a bang! webinar to learn more about running a social enterprise.

You may want to operate your organisation for the benefit of a group or community, as a charity or as a not-for-profit.

If so, there are legal structures that suit these types of organisations. Each structure has different legal obligations, liabilities, advantages and disadvantages.

To help you decide which structure is best for you, learn more on the Office of Fair Trading website:

• Incorporated associations
  Starting, running and winding up an incorporated association.
• Cooperatives
  Registering, operating and winding up a cooperative.
• Charities
  Registering, running and winding up a fundraising organisation.