Kalahari Group

MENU

Business Structures

An Important Decision You'll Face in Entrepreneurial Journey is Business Structures.

When choosing a structure, consider your business’s size and type, your personal circumstances, and your growth plans.

As your business develops or your situation evolves, you have the option to change its structure.

The way you structure your business can shape your:

  • Tax liabilities,
  • Owner responsibilities,
  • Potential personal liability,
  • Asset protection,
  • Ongoing expenses and necessary paperwork.

business structures

Sole Trader

A sole trader is the easiest and most affordable business structure to establish. As a sole trader, you’ll be legally accountable for every part of the business. You’ll usually make all the decisions about starting and managing your business, and you can hire employees.

Partnership

A partnership consists of two or more people teaming up to run a business for profit. In Western Australia, partnerships are regulated by the Partnership Act 1895. For small business owners, the most common type is a general partnership, where all partners are involved in the daily management of the business.

Tust

A trust is a setup where a trustee manages the business for the benefit of the trust's members (or beneficiaries). A trust is not considered a separate legal entity.

Company

A company is its own legal entity, able to incur debt, sue, and be sued. The shareholders (owners) can limit their personal liability, so they’re usually not responsible for the company’s debts.

BUSINESS STRUCTURES MORE EXPLANATIONS

Benefits of Being a Sole Trader

  • Easy Setup and Operation: Starting and running your business is straightforward.
  • Full Control: You make all decisions and keep all profits.
  • Less Paperwork: There are fewer reporting requirements.
  • Tax Benefits: You can offset business losses against other income like investments or wages (with certain conditions).
  • Simple Tax Filing: Use your personal tax file number (TFN) to file tax returns.
  • No Payroll Taxes: You don’t pay payroll tax, superannuation, or workers’ compensation on your business income.
  • Flexible Structure: It’s easy to change your business structure as it grows or if you decide to close it.

Drawbacks of Being a Sole Trader

  • Unlimited Liability: Your personal assets are at risk if the business faces trouble.
  • Limited Tax Planning: You can’t split profits or losses with family members, and you pay tax on all business income.

Other Important Points

Business Name:

  • If you use your own name, you don’t need to register a business name.
  • If you choose a different name, you need to register it with the Australian Securities and Investments Commission (ASIC).
  • Get an Australian Business Number (ABN) before registering a business name. You can apply for an ABN online for free.

Tax Requirements:

  • Report business income or loss on your personal tax return and pay individual tax rates.
  • Register for goods and services tax (GST) if your annual turnover is over $75,000.
  • You might need to make pay-as-you-go (PAYG) instalments as pre-payments for next year’s tax.
  • Consider saving money or making voluntary payments to cover future tax obligations.
  • Visit the Australian Taxation Office (ATO) website for more details on tax obligations.

Personal Services Income (PSI):

  • PSI is income earned from your skills or efforts.
  • More than 50% of your contract income should come from your skills, knowledge, or efforts.
  • Check if PSI rules apply to you.

Insurance:

  • As a sole trader, you are liable for all business debts, including personal assets.
  • You are not covered by workers’ compensation if you get injured at work, which could lead to a loss of income and ongoing business expenses.
  • Look into various insurance options to protect your business.

What is a Partnership?

A partnership is when two or more people join forces to run a business with the goal of making a profit. In Western Australia, partnerships follow the Partnership Act 1895. The most common type is a general partnership, where all partners are involved in managing the business.

Benefits of a Partnership

  • Easy Setup: Starting a partnership is simple.
  • Less Paperwork: There are minimal reporting requirements.
  • Shared Management: Partners share control and decision-making.
  • Tax Advantages: You can offset business tax losses against other personal income, under certain conditions.
  • Easy to End: Dissolving the partnership is relatively straightforward.
  • No Employee Obligations: Partners aren’t considered employees, so superannuation and workers’ compensation insurance aren’t required.
  • Better Financing Options: Easier to get finance since it’s not dependent on just one person’s income or assets.

Drawbacks of a Partnership

  1. No Legal Separation: Partners are personally liable for the business’s debts, with no protection for personal assets.
  2. Potential Conflicts: Disagreements can arise over profit sharing, management, and business direction.
  3. Ownership Changes: Transferring ownership can be difficult and usually requires forming a new partnership.

Important Considerations

Partnership Agreement:

  • It’s wise to have a lawyer draft a formal agreement that outlines:
    • Each partner’s role and authority.
    • Each partner’s financial contribution.
    • How to resolve disputes.
    • How to end or leave the partnership.
  • This agreement is crucial because each partner has unlimited personal liability. If the business fails and a partner can’t pay their share of the debts, you are responsible for covering the shortfall. You are also jointly liable for any debts your partner incurs, whether you know about them or not.
  • Without an agreement, all partners are assumed to own equal shares of each asset.

Tax Requirements:

  • The partnership itself doesn’t pay tax on its income. Instead, each partner pays tax on their share of the net income.
  • Partners might need to make PAYG instalments, similar to sole traders.
  • Individual tax rates apply to partners who are individuals (people), not to companies or trusts.

What is a Company?

A company is its own legal entity, meaning it can take on debt, sue, and be sued independently of its owners. The shareholders (owners) generally have limited personal liability and aren’t responsible for company debts.

Setting Up a Company

Forming a company is more complex and costly compared to other business structures. You can set up a company as either a private (proprietary) or public entity. A registered company needs at least one director (and a company secretary if it’s a public company). The director manages the company’s business activities.

To start a company, you must:

  • Incorporate under the Corporations Act 2001.
  • Register with the Australian Securities and Investments Commission (ASIC).

You can find more information on the ASIC website.

Benefits of a Company

  1. Limited Liability: Shareholders are not personally liable for company debts.
  2. Recognized Structure: Companies are well-understood and widely accepted.
  3. Capital Raising: Easier to raise large amounts of capital.
  4. Carry Forward Losses: Losses can be carried forward indefinitely to offset future profits.
  5. Transferable Ownership: Ownership can be easily sold or passed on.
  6. Profit Distribution: Profits can be reinvested or paid to shareholders as dividends.

Drawbacks of a Company

  1. High Costs: Significant expenses for setup and ongoing maintenance.
  2. Less Control: Shareholders do not retain full control.
  3. Complex Reporting: More complicated reporting requirements.
  4. No Loss Distribution: Can’t distribute losses to shareholders.

Other Considerations

Tax Requirements:

  • Companies pay income tax on their profits at the company tax rate.
  • There is no tax-free threshold, so tax is paid on every dollar earned.
  • Visit the ATO website for more details on tax obligations.

Legal Requirements:

  • Company officers and directors have specific legal duties and responsibilities as outlined in the Corporations Act 2001.

What is a Trust?

A trust is a business structure where a trustee manages the business on behalf of the trust’s members (beneficiaries). A trust itself is not a separate legal entity.

Trustee Role

  • The trustee can be an individual or a company.
  • The trustee is legally responsible for the trust’s debts and can use the trust’s assets to pay them.
  • If the trust’s assets aren’t enough to cover the debts, the trustee must cover the shortfall.

Types of Trusts

  • Discretionary Trust: The trustee decides how to distribute funds to each beneficiary.
  • Unit Trust: The trust’s interest is divided into units, and distribution is based on the number of units each member holds.

Benefits of a Trust

  1. Reduced Liability: Especially with a corporate trustee.
  2. Asset Protection: Assets are safeguarded within the trust.
  3. Flexible Distribution: Flexibility in distributing assets and income.

Drawbacks of a Trust

  1. Costly and Complex: Setting up and administering a trust can be expensive and complicated.
  2. Hard to Change: Once established, it’s difficult to dissolve or modify, especially if children are involved.
  3. Penalty Tax Rates: Profits retained for reinvestment incur high tax rates.
  4. No Loss Distribution: Only profits, not losses, can be distributed.

Other Considerations

Tax Requirements:

  • The trustee must apply for a tax file number (TFN) and file an annual trust return.
  • The trust doesn’t pay tax directly; instead, the trustee or beneficiaries pay tax on the trust’s net income.
  • If income isn’t fully distributed to beneficiaries, the trustee pays tax on the undistributed income at the highest marginal rate.

What are the Differences with Each Business Structures?

Subscribe To Our Newsletter For Latest Update

Let's Structure Your Business To Maximise Revenue

Call us today at 08 9200 3973