Your Business Structure
Your business structure is the next important decision
you'll make once you've chosen creating a business as your first money
Each country has its own laws concerning the various structures, and what
follows applies specifically to Australia. But most countries offer similar
business structures (such as companies and trusts) so this will give you a
general overview of the choices.
You'll need the services of a professional accountant in any case if you decide
to set up any structure other than that of a sole trader, so he or she will
provide all the specific information pertaining to the laws of your own
The main business structures are as follows:
You can set up a business in your own name, without co-owners or partners.
The structure can be easily changed to a partnership or company if the
situation later requires it.
- It's a simple way to do business and there are no establishment
- You're in full control, dealing as an individual directly with all
- You don't need to register a business name, unless using one other than
your own name (John Smith & Company versus John Smith).
- You're taxed as an individual, although you may have to pay provisional
tax (which is your estimated annual or quarterly tax, payable in
- You don’t share the profits.
- You aren't required to keep financial records.
- You can operate with a minimum of government restrictions.
- Sole traders have the best capital gains tax concessions.
- You are personally liable for any damages incurred by the business and
you have no asset protection.
- You're limited by what you can personally contribute to the business in
terms of capital, resources, skills, knowledge and borrowing
- You pay tax at your personal tax rate, which can be 50% higher than the
company tax rate.
- There's no way to shelter income for tax purposes.
- You're limited in terms of tax breaks, growth prospects, and in the
ability to share the workload, risks and losses.
- Customers and other businesses may not take you seriously.
- Register a business name if you have added words to your full
- In Australia, consider registering for GST.
You can set up a partnership with one or more persons with a view to making
a profit. Legally, a partnership agreement is valid for a minimum of one
A partnership is not a separate legal entity and the partners are taxed as
individuals. Partnerships have their own tax file number and must lodge an
annual tax return, even though they don't pay tax.
- Like sole trading, a partnership is a simple way to do business and
there are no establishment costs.
- Partners share liability for damages and debts so the burden is less
than a sole trader's.
- Partners may have a wider range of capital, resources, skills,
knowledge and borrowing capacity to contribute to the business than a sole
- Partnerships offer more tax breaks and growth prospects, as well as a
greater ability to share the workload, risks and losses than a sole
- Not all partners need be active in the business.
- Partnerships have no legal accounting or recording
- Capital gains tax concessions are available to the individual
- Partners pay their portion of the partnership's tax at their personal
tax rates, which may be substantially higher than the company tax
- There's no way to shelter income for tax purposes.
- Partnerships have unlimited liability and each partner can be sued
individually and jointly for the partnership liability.
- Each partner has joint and individual liability for debts and losses
incurred by himself OR any of the other partners.
Private Company or Corporation
- Each partner should sign a full, specific and unambiguous partnership
agreement, setting out terms regarding shares, assets, profits, liability,
termination and disputes. If this is not done, state legislation determines
the rights and duties of the partners.
- Register a business name if the partnership has added words to the full
names of the partners.
A company is a separate entity, both legally and for tax purposes, and can
enter into agreements in its own name. It's composed of shareholders and
officers and managed by directors who are company employees. An individual
can be the sole director and the sole shareholder of a company if they so
A company has specific reporting and accounting requirements set by the Tax
Office, and must pay taxes on its earnings. It can own property, enter into
contracts, take legal actions against others and be held legally liable for its
- While shareholders own the company, the liability of each shareholder
is limited to the amount paid to the company for the total shares
- Shareholders receive profits through dividends, which include a tax
credit if they are 'fully franked' (i.e., the company has paid tax on the
- Companies pay tax at a fixed rate (lower than the individual rate) and
taxes may be minimized by legal means.
- Companies can hire skilled management.
- Companies offer more retirement plan opportunities for
The Role of a Company Director:
- Companies are more complex and expensive to set up and
- Companies are more strictly regulated and monitored by government
regulatory and tax bodies.
- Directors can be held personally liable for damages incurred by the
company if the director has behaved irresponsibly or fraudulently.
- A company director must act honestly, with diligence and in the
company’s best interest, without making improper use of their position,
especially with regard to inside information.
- A director must ensure that accounting records are kept and tax
obligations are met.
- A director enters into agreements on behalf of the company.
- A director can be held accountable for negligence or breaking company
law or the company’s constitution.
- A director may be sued by shareholders or outside parties.
- Reserve a company name with the requisite government body (ASIC in
- Lodge the prescribed documents with the requisite government body,
including the company’s constitution.
A trust is not a separate entity by law, although it must lodge its own
annual tax return. It is operated by a trustee, who makes decisions on behalf
of the beneficiaries. Any profits made by the trust must be distributed
annually to the beneficiaries, who then pay tax at their individual rates on
what they receive.
There are several types of trusts:
A business can trade as a trust.
- Family or discretionary trusts
The trustee has discretion with regard to the way he or she distributes
income and capital to the beneficiaries.
- Unit trusts
The trustee distributes the income and capital according to the number of
units each beneficiary holds in the trust.
- Hybrid trusts
These are a combination of discretionary and unit trusts.
- Testamentary trusts
This type of trust is created by a will and comes into effect when the
person who created the trust dies.
- The business can distribute income to the beneficiary with the lowest
- If the trustee is sued, the assets in the trust are separate and
- There is a higher degree of protection if the trustee is a company,
with a single director.
- Trusts continue for 80 years or until they are dissolved.
- You must set up a company and/or trust through an accountant or lawyer,
so there are costs involved. Trust deeds must be prepared by a lawyer, but
an accountant can organize the process.
- Trusts are more complex to operate than sole trading or
- Like a company director, trustees have obligations and
Many people use a combination of structures to run their businesses, with an
eye to protecting assets as well as minimizing taxes. Robert G. Allen, in his
book Multiple Streams of Income, offers an excellent example of this in
the chapter on Financial Fortress Strategies. Find an accountant or
lawyer in your area who specializes in creating this kind of structure and get
some professional advice on what will work best for you.
A final word on the use of business names. Here are the key points to
- A business name must be registered if a sole proprietor or partnership has
added words to the full name/s of the persons involved in the business (e.g.,
Joe Smith & Sons).
- Check that the name is not already in use or prohibited.
- Fill in an application form and submit it to the appropriate government
- The certificate of registration must be prominently displayed in your place
- Your business registration number must be shown on all stationery and
- Register and renew the business name when required.
Your Next Step:
- If you're on a budget and starting a business in Australia, you can set up
a company yourself by obtaining the necessary documents from your local office
of The Australian Securities And Investments Commission (ASIC) and submitting them with the required fee
(around $800 at the time of this writing). It will cost around $200 each
year to renew the company registration. An accountant will charge around
$1,500 to set up a company.
- A low cost alternative to purchasing a trust through an accountant or
lawyer is to buy one online.
Law Central is an excellent Australian
site from which you can purchase a company, trust, or any other kind of
legal documentation such as wills and power of attorney. You can build a
draft version of the document online at no cost, with each step of the
process accompanied by an explanatory pop-up screen. Your draft version
remains on the web site until such time as you choose to purchase it.
- For other countries, check your telephone directories for qualified
accountants and lawyers, research the Internet, or ask your friends and
business colleagues for referrals.
- In the USA, visit the web site of the Small Business Administration for loads of free
material on starting a small business.
- Finally, you can find a variety of books on business structure at the
Amazon web site:
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