Sole Trader

Setting up of this business structure is relatively simple and inexpensive as it involves very limited legal and tax planning opportunities. The profit of a sole trader business structure is reported in the individual tax return of the owner and income tax is paid based on their individual tax rates.  

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Advantages:

• Cheap and easy to set up.

• High degree of control over the business.

• Income belongs solely to you.

• No business TFN is required. 

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Disadvantages:

• There is no limited liability and your personal assets are at risk.  If you incur a debt, creditors may have a claim on your personal assets. 

• Income is taxed at individual income tax rates. 

• Does not enable other partners to own a portion of the business and share the risk/reward.

• Business subject to life and health of owner. 

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Company Structure

A company is registered and becomes a separate legal entity. This gives the company the ability to act as a ‘natural person’ and enter into agreements as its own entity. This structure is best suited to small/medium/large businesses due to the higher running costs. 

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Advantages:

• Limited liability applies and it most cases, personal assets are safe.

• Financing raising (recognised for both debt and equity funding). 

• Flexible business expansion prospects.

• Written shareholder agreements clarifies governance and dispute processes.

• Separate legal personality.

• Unlimited life.

• Flexibility in introducing partners to the business. 

• Tax benefits afforded to Companies.    

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Disadvantages:

• Cost of Set-up (though basic cost has reduced in recent times for simple company structure establishment).

• Ongoing costs (tax reporting and accounting).

• Regulation by the ASIC and Corporations Act 2001 (Cth).

• Limited tax concessions (i.e. capital gains tax and tax losses). 

• Director obligations and liabilities, including severe personal penalties. 

• Insolvent trading risks to directors personally. 

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Trust Structure (discretionary trusts & family trusts)

A trust structure is used when a business or assets are held for the benefit of others. The people benefitting from the business or assets are beneficiaries. The person holding the benefit for others is called the Trustee. Trustees are responsible for everything in the Trust and are required to report income through a trust income tax return.

 

Advantages:

• Beneficiaries are not liable for debts of the Trust.

• Income can be distributed at the Trustee's discretion to beneficiaries providing tax planning opportunities. 

• Where a Company is the Trustee, in most cases, liability is limited. 

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Disadvantages:

• Cost of Set-up (though basic cost has reduced in recent times for simple establishments of Trusts).

• Ongoing costs (tax reporting and accounting). 

• Problems may arise when trying to dissolve or alter an established Trust.  Varying the Trust's terms or objects could amount to a resettlement and liability for capital gains tax and stamp duty may arise. 

• The Trust Deed limits a trustee's powers. 

• A Trust must distribute profit/income to beneficiaries each financial year. 

• After a Trust is established, it continues for a period set out in the Trust Deed. 

• Individual Trustees can be personally liable for the Trust's debts (subject to the Trust Deed providing that the Trust's assets indemnify the Trustee). 

• Difficulty in attracting investors. 

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Partnership Structure 

A Partnership involves two or more people in managing and operating a business with a common view to profit. A partnership has its own ABN, Tax File Number, GST registration and it will lodge its own tax return each year. Ownership can be equal ((i.e. 50/50) or different (i.e. one partner may have 40% interest and another 60%). Whilst a partnership must lodge a tax return, the business does not pay income tax as the profits (or losses) are distributed to the partners in accordance with their ownership percentages.

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Advantages:

• Cheap and easy to set up (although more expensive than a Sole Trader structure). 

• High degree of control over the business. 

• Shared legal responsibility for the business amongst partners. 

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Disadvantages:

• There is no limited liability (usually a liability caused by one partner shall cause all other partners to be joint and severally liable). 

• Transfer and termination of partners and/or Partnerships may have complications and need to be accounted. 

• Potential for decision-making conflict.

• If a partner exits the business or dies, the partnership must be dissolved and a new one started. 

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Any advice on this page is general in nature and is intended for information purposes only.  When determining a suitable structure, there is no one size fits all. If you wish to understand which structure best suits your needs, we would be happy to assist.