The different types of business structure
There are seven business structures in Australia: sole trader, partnership, company, joint venture, co-operative, trust and indigenous corporation. The type of business structure set up will influence key business operations, such as the tax required to be paid and start-up costs.
Sole trader
A sole trader business is owned by one person who has complete control over business decisions and its assets. Commonly, a sole trader is described as being self-employed, but they do not have to go it alone in all aspects – they can employ staff.
A sole trader is legally responsible for all aspects of the business, including debts as well as day-to-day business decisions, but they do not require a separate business bank account. However, a separate bank account can be easier for sole traders to keep track of business income and expenses.
Partnership
A partnership is a business structure in which two or more people share control and management of the business. They distribute the income or share the losses between themselves. Partners do not pay income tax on the total income earned by the partnership, but they do on their share of the net income.
There are three main types of partnership: general partnership (GP), limited partnership (LP) and incorporated limited partnership (ILP). General partners are equally responsible for business management. Limited partners are usually passive investors who are not involved in the day-to-day management of the business, and their liability is limited to the amount of money they contribute to the partnership. Incorporated limited partners have limited liability for business debts, but there must be at least one general partner involved who has unlimited liability.
Each state in Australia has its own partnership laws to adhere to.
Company
A company is a separate entity to the person(s) who start up the business. As members, a company’s founders are not liable for its debts, although they can be held personally liable if found to be in breach of their legal obligations. Business operations are owned by shareholders, and are controlled by directors.
A company has higher set-up and running costs than some other business structures, although it also has wider means of securing capital. A company business structure suits owners who expect the business’s income to vary widely, and possibly want to use losses to offset future profits. There are particular reporting obligations which are required by law for this type of business structure.
Sole traders and companies have similar tax and reporting obligations, but there are some differences to be aware of before committing to one or the other. For example, sole traders have a tax-free threshold of a certain amount of income they can earn before they are taxed, whereas companies pay tax on every dollar earned. Sole traders also pay tax at individual income tax rates, while companies pay tax at the flat rate of 30 per cent. Sole traders can withdraw money from the bank account at will, while a director of a company is paid a wage, fee or salary, and may also receive dividends, but does not have immediate access to funds. While both require certain financial records to be maintained and kept for at least five years, company records are more complex.
Joint venture
A joint venture involves two or more people, companies or organisations who work together on a specific project or purpose, such as creating a new product or providing a new service. The venture may be short or long term, but it is temporary, and the parties are not involved in ongoing business. Each participant is responsible for profit, loss and costs, however the venture is its own entity and is separate from the participants’ other business operations.
It can be useful to engage in a joint venture to collaborate and combine resources or expertise, or to expand or grow in a particular area. When entering into a joint venture agreement, it is imperative to seek legal advice and determine financial contributions, division of profits and losses, and ownership of intellectual property.
Co-operative
A co-operative is a member-owned business structure that is legally incorporated to serve the interests of its members. There are two types of co-operative – distributing and non-distributing – but at least five members are required for both.
Distributing co-operatives will distribute profits to members based on the number of shares they hold. Non-distributing co-operatives cannot share profits with members, nor do they hold shares. Members are usually charged a subscription fee, and profits are used to further the co-operative’s purpose.
Co-operatives provide goods and services that may be unavailable or too costly for members to access on their own. They are governed by a board of directors who are elected by members, who have an equal vote regardless of any shares they may hold.
Common co-operatives include credit unions and mutual banks, mutual insurers and retail buying groups.
Trust
A trust is where a trustee completes business on behalf of the trust’s members or beneficiaries. A trustee may be one person, or it may be a company, and they decide how business profits should be distributed to beneficiaries. A trustee is legally responsible for all its operations and must complete formal administrative tasks every year.
For example, a trust can be set up to manage a family business on behalf of a large number of family members.
Indigenous corporation
Business owners who are indigenous can register as an indigenous corporation, under which they may be eligible for additional benefits.
The reasons why an indigenous corporation may be set up as opposed to another type of business structure include to develop Aboriginal and Torres Strait Islander infrastructure, or to promote art, music or performance.
How to choose a business structure
In most cases, the type of business is determined by simple factors – for example, if the business owner will be the only person owning and operating the venture (sole trader), if two or more people are involved and will share in the income (partnership), or if two or more people will work together on a short-term project (joint venture).
If still in doubt, consider the different licences and registrations that may be required under different business structures, potential personal liability, ongoing costs and tax requirements, and how much control (or lack of) is desired for day-to-day business operations.
It may also be useful to consult with an accountant, lawyer or business adviser before deciding on a business structure to pursue. At the least, consult with the Australian Government’s Business Registration Service, which has an online tool that can help determine the right type of business structure.
Business structures can change
After a business structure has been determined, and even if it has been operating under that structure for a long period of time, it can still be changed to become another type of business. For example, a sole trader may decide to go into partnership with another person, or perhaps the size and operations of the business evolve and it is best for it to become a company to continue to grow. Or, a partnership may dissolve, and one partner involved may become a sole trader.
Business owners can register their change in business structure. Keep in mind that the original Australian Business Number (ABN) may also need to change, there may be additional costs associated with changing the business type, and new obligations may need to be fulfilled under the new business structure.
It may take a little research, but determining the business structure before beginning operations is an easy process that will help prevent issues from occurring in the future. It also is not a permanent measure and can be changed at a later date if required.
