The most common business structures are:
Regardless of the structure, all business entities must apply for a tax file number (TFN), register for an ABN and for GST if its annual GST turnover is $75,000 or more, and lodge quarterly or annal BAS (Business Activity Statement) and/or IAS (Instalment Activity Statement) if applicable.
As a sole trader you conduct business as an individual. All legal rights and obligations of the business are yours. The assets and liabilities of the business are essentially your personal assets and liabilities. Since there is no separation between the legal identity of the business and your own, you have unlimited liability for the debts of the business, meaning that in the event your business become insolvent, your personal assets including your home may also become the subject of creditors claims.
From a tax perspective, there are less tax planning options open to sole traders, and the business’ profits are taxed at personal rates.
A partnership is a a business structure that allows a group of people to combine resources and run a business together and share profits.
A written partnership agreement though not essential is highly recommended to prevent misunderstandings and dispute, by clearly defining each partner’s rights and obligations, share of profit and how the business is managed and controlled.
The partners in a partnership are not employees, but the partnership might also employ other workers. Partners are responsible for their own superannuation arrangements. However, the partnership is required to pay superannuation for its employees.
The partnership profits are taxed in the hands of the partners at the individual tax rate and may be eligible for the small business tax offset.
A company is a separate legal entity from its shareholders and therefore provides some protection over its owner’s personal assets. However, its directors can be legally liable for their actions and the debts of the company if in breach of their directors duty.
A company pays tax at the company tax rate and may be eligible for small business concessional rates. It must pay super guarantee contributions (SGC) for any eligible employee and directors.
Apart from tax return, Companies are required to lodge an annual return to the Australian Securities and Investments Commission (ASIC).
A trust is a structure where a trustee carries out the business on behalf of the trusts members (or beneficiaries). A trust is not a separate legal entity.
A trustee may be an individual or a company. The trustee is legally liable for the debts of the trust and may use its assets to meet those debts. However, if there is a shortfall the trustee is responsible for the difference.
A trust is set up through a trust deed and there are two main types: discretionary or unit trusts.
In a discretionary trust, the trustee has discretion in the distribution of funds to each beneficiary. In a unit trust, the interest in the trust is divided into units with their distribution determined by the number of units held by each member.
The advantages of a trust includes limiting liability especially if corporate trustee, asset protection, and most importantly, flexibility of asset and income distribution.
The disadvantages include high setup and admin costs, difficulty to dissolve or change particularly where children are involved, penalty tax rates on profits retained in the business, inability to distribute losses, only profits.
For more information regarding your tax obligations as a trust visit the ATO website.
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Disclcaimer: The information provided within this article is general information only. None of the comments in these notes are intended to be advice, whether legal, financial product or professional. You should obtain specific advice regarding your particular circumstances from a tax or legal professional.
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