What’s the right small business structure for my start-up?

Which small business structure is right for me?

Your small business structure is essentially the way you will operate your business.

Your business structure can determine:

the amount of tax you will pay
whether you're an employee or the owner of the business
your potential personal liability
the amount of control you have over the business
the ongoing costs and amount of paperwork required for your business.

Our team are experts in small business start-ups and can help you determine the right structure for your business.

What types of small business structures are there?

A small business structure determines how your business operates in Australia. According to the Australian Taxation Office, your structure may affect the taxes you’re liable to pay, your asset protection and any business costs.

This means it’s important to choose the right structure so you’re not overpaying – or underpaying!

In Australia, most businesses fall under one of the following four structures:

While the structure you choose is important to your business operations, you’re not locked into a structure decision. As your business grows and changes, your structure can be changed too!

Breaking down the different structures

Sole Trader

A sole trader is exactly as it states – an individual running a business. It’s considered the cheapest and easiest small business structure as you’re in control of the whole business.

However, just because it’s the cheapest doesn’t mean it’s the right one for your business.

Being a sole trader comes with a lot of additional business responsibilities and personal liabilities.

As a sole trade you should:

use your individual tax file number when lodging your income tax return
report all your income in your individual tax return, using the section for business items to show your business income and expenses (there is no separate business tax return for sole traders)
apply for an ABN and use your ABN for all your business dealings.

Partnership

A partnership is when a business is run by a group or association of people who distribute income and losses between themselves. Partnerships are common when individuals start a business with friends or family, or for the running of primary production businesses.

A partnership:

has its own tax file number and must lodge an annual partnership return showing all income and deductions of the business
doesn't pay income tax on the profit it earns – each partner reports their share of the partnership income in their own tax return
must apply for an ABN and use it for all business dealings.

While written agreements aren’t necessary for partnership businesses, we highly recommend them! Your agreement should outline what each partner brings to the table, the agreed responsibilities and what each member is entitled to receive from the business’ income.

Company

A company structure is when a legal business entity is owned by shareholders and run by directors. Companies often have higher set-up and administration costs. However, companies can offer better risk protection and more flexible tax opportunities.

A company is also regulated by the Australian Securities and Investments Commission (ASIC).

They’re common when it comes to small business start-ups and growing sole traders.

Companies:

own the money that the business earns - the individuals who control the business cannot take money out of the business, except as a formal distribution of the profits or wages
must lodge an annual company tax return
must pay super guarantee contributions (SGC) for any eligible workers, including its directors
must have their own tax file number for lodging their annual tax return
must apply for an ABN and use it for all business dealings.

Trust

A trust is an arrangement whereby a trustee holds property or income for the benefit of others. A trust can be an expensive small business structure as it requires a formal deed outlining how it will operate. It can be an effective small business structure for purchasing business property.

A trust:

There are also different types of trusts – discretionary trusts and unit trusts. A discretionary trust provides the trustee with the discretion to determine which beneficiaries receive distributions and the amount each year.

Alternatively, in a unit trust, the trustee divides the assets of the trust into fixed and measurable parts, called units. Unit holders receive a fixed number of units in a similar way that shareholders acquire shares in a company.

Unsure which is the right structure for you?

If you’re still unsure which is the right small business structure for your start-up, it might be time to speak to specialist small business accountant – like us!

We offer tailored accounting for your business, and incorporate expert advice and support, whenever you need it. Let us take care of your business finances so you can focus on what you do best.

Start by downloading our guide to starting a small business or speaking to our team today.