Understanding Business Structures in Australia

Business structure is the legal framework of an organisation that defines its ownership arrangement and profit distribution. Aspiring entrepreneurs must choose the structure carefully because it can affect their liabilities and tax bills. The choice of structure depends on the size and type of the venture. Entrepreneurs must identify the right structure based on their needs and future plans.

The structure will decide the control of the owners, tax liabilities, licenses required, personal liability, operational expenses and more.  Australia has five types of business structures: company, sole trader, partnership, trust and cooperative. They differ on various parameters, ranging from legal obligations to the costs involved in setting up.

Budding entrepreneurs who intend to launch a new venture must evaluate the pros and cons of each structure type before adopting it. Here is a guide on different business structures in Australia. It can help new entrepreneurs make an informed decision to ensure stability and success.

1. Company

A company is an independent legal entity operated by a board of directors and owned by shareholders. The company is responsible for its taxes and superannuation responsibilities. The shareholders are not legally responsible for these costs. However, they can be liable for tax obligations if they use the business assets and capital for personal work.

The profits are distributed among the shareholders through dividends along with franking credits. It helps the shareholders to get a credit for the tax paid by the company on the profits. New entrepreneurs looking for opportunities through the sale of businesses online usually opt for a company because of its popularity. They must understand that setting up and managing this business structure is more complicated than others.

The operational costs are high, and the shareholders must comply with the Corporations Act 2001. The income generated by the business belongs to the company, and the members have limited liability.

2. Sole Traders

A sole trader business structure is the easiest to set up and is the most cost-effective. The business owner is responsible for its debts and losses, and paying superannuation to workers. The owner fully controls the business and makes all the decisions independently. They have few reporting obligations and can file taxes using their tax file number (TFN). Although these businesses do not need a separate bank account, they must open a business bank account to track business expenses.

The sole trader has unlimited liability and can hire staff members. They can claim deductions for the business expenses incurred through salaries and allowances paid to the workers. However, they cannot claim deductions for personal expenses. Since they are responsible for the losses, their assets are at risk if the business fails.

3. Partnerships

A partnership is a business that comprises two or more owners. The income and losses incurred by the partnership are shared among the partners. The legal regulations for this business structure can vary in every state or territory. Thus, entrepreneurs who intend to complete the sale of business online must inform the buyers about compliance obligations. Partnerships can be of three types, including general, limited and incorporated limited partnerships.

• General Partnerships

In this business structure, all the partners share the business management responsibility and have unlimited liability for debts and losses.

• Limited Partnerships

As the name suggests, this business structure offers limited liability to partners according to their invested amount. The limited partners are not directly involved in the daily operations and are considered passive investors.

• Incorporated Limited Partnership (ILP)

In this business structure, all partners have limited liability except one general partner, who has unlimited liability. So, if the business incurs losses, the general partner becomes personally liable for the debts.

4. Trusts

A trust is managed by a trustee on behalf of its beneficiaries. The trustee can be an individual or a company responsible for the income and losses. Establishing this business structure is highly complex and requires significant capital. Trusts also have high tax obligations compared to other structures. The trustee controls the business and makes decisions related to the distribution of profits among the beneficiaries.

The trust deed regulates the operations of this structure, and the trustee takes care of the taxes. The tax is paid by the beneficiaries who receive the trust income. If any part of the income is not shared with the beneficiaries, the trustee becomes liable to pay tax.

5. Cooperatives

A cooperative is a business with a minimum of five members who jointly own it. It can be a profit sharing entity or a non profit organisation. All the members have equal rights in a cooperative, even if their investments vary. They make decisions mutually and have limited liability for debts based on their contributions. These structures follow the principles of non discrimination, independence, democracy and education of communities. The Cooperatives National Law regulates cooperatives.

These can be of two types – distributing and non-distributing. The former structure distributes profits among its members, while the latter does not. The distributing cooperative also offers shares to the members. Thus, entrepreneurs who opt for the sale of their business online must inform buyers about the business structure to help them choose wisely.

Wrapping Up

Business buying and selling is increasing rapidly because many new players are joining the market and old ones are exiting. New entrepreneurs need to understand different business structures to know their obligations. They must evaluate each structure’s pros and cons before purchasing.