Starting a Business - Business Structures

​This post is the third in a series of posts on the topic of Starting and Running your own business.
 
After reading the last post you have decided to turn your hobby into a business. The next thing you need to consider is what business structure should you choose?
 

Your business structure determines:

• the licenses you require
• how much tax you pay
• your potential personal liability
• how much control you have over the business, and
• the ongoing costs and volume of paper work for your business.

 
Choose the structure that best suits your needs by considering the key features of each structure. You can change your business structure as your business grows and expands but there may be costs involved.

​There are four business structures:

​1. Sole Trader

A sole trader is an individual who operates their business alone. For example, you are running your business in your own name.
 

The key features of being a sole trader include:​  

• it is simple to set up and operate
• gives you full control of your assets and business decisions
• requires fewer reporting requirements than other business structures and is generally a low-cost structure
• allows you to use your individual tax file number (TFN) to lodge tax returns
• you are personally liable to pay tax on all the income earned at the individual tax rates (up to 48.5% of income)
• all your personal assets are at risk if things go wrong. Your assets can be seized to recover a debt
• you can use your personal bank account
• you are responsible for your own superannuation arrangements
• if you do not employ staff, there is no costs such as, employee superannuation contributions or workers' compensation insurance
• you can employ people to help you run your business. When you employ people there are compulsory obligations that you must comply with, such as, payroll tax, workers' compensation insurance and superannuation contributions.

2. Partnership

A partnership involves two or more people who carry on a business together and share the income. For example, you may decide to operate your business in partnership with other business that complement the services of goods you provide.
 
The key features of being in a partnership include:

• it is relatively easy and inexpensive to set up
• requires a separate TFN
• you and your business partners are personally liable for the debts of the business
• you have shared control and management of the business with your partners
• the partnership does not pay income tax. You and each of your partners pay tax (at the individual tax rates (up to 48.5% of your income)) on the share of the net partnership income you each receive
• a partnership tax return must be lodged with the Australian Taxation Office (ATO) each year
• you are not an employee of the partnership
• each partner is responsible for their own superannuation arrangements
• personal differences about how to run the business may interfere with business operations 
• the partnership can employ people and must comply with certain obligations, such as, payroll tax, workers' compensation insurance and superannuation contributions.

​3. Company

A company is a separate legal entity, unlike a sole trader or a partnership structure. You may set up your business as a company where you are the director of the company and the sole shareholder.  You may receive income from the company as director’s fees, or as an employee or from dividends as the shareholder.

​The key features of a company include:

• a company has the same rights as a natural person and can incur debt, sue and be sued.
• it is a more complex business structure to start and operate
• business operations are controlled by directors and owned by the shareholders
• involves higher set up and running costs than other structures
• has limited liability. Usually this means shareholders can only lose the value of their shares and are not liable for the company's debts
• requires you to understand and comply with all obligations under the Corporations Act 2001
• the money the business earns belongs to the company
• requires a separate TFN
• requires an annual company tax return to be lodged with the ATO and annual financial statements to be lodged with the Australian Securities and Investments Commission (ASIC)
• the tax rate for companies (generally 30%) is less than the highest rate for individuals (up to 48.5%).

4. Trust

A trust is not a separate legal entity. A trust is a relationship where a trustee (an individual or a company) carries on business for the benefit of other people (the beneficiaries). You may set up and run your business where you are the trustee. You may receive income from the trust as an employee or from distributions you receive as a beneficiary of the trust.

​The key features of a trust include:

• it can be expensive to set-up and operate
• it is a complex legal structure, which must be set up by a solicitor or an accountant as it requires a formal trust deed that outlines how the trust operates
• provides asset protection and limits liability in relation to the business
• it requires the trustee to undertake formal yearly administrative tasks
• if you operate your business as a trust, the trustee is legally responsible for its operations.
• beneficiaries of a trust are generally not liable for the trust debts, unlike sole traders or partnerships
• beneficiaries of a trust pay tax on income they receive from a trust at their individual tax rates
• unlike a company, a trust cannot retain profits for expansion without being subject to penalty rates of tax.

Many government agencies including  the  ATO, www.business.gov.au, and  www.business.qld.gov.au provided further information to help you understand the different business structures.  
 
It may also be useful to obtain professional advice as to whether you are a hobby or a business from a solicitor, an accountant or a business advisor.
 
Why not make a complementary consultation with me today to go through your business ideas.
 
Once you have decided on the structure of your business, the next step is to develop your Business Plan. Studies have shown that businesses with formal business plans in place are more successful, irrespective of size or type.   
 
My next post will look at planning your business operations. ​