How To Choose The Right Business Structure
Choosing the right business structure is crucial to ensure its long-term success. The right structure can help protect your assets, limit your personal liability, and maximise tax benefits. Whether you’re starting out or have an established business, it’s worth taking the time to assess which structure is best for you.
In this article, we will discuss the types of business structures and how to choose the right one.
What Are The 4 Types Of Business Structures In Australia?
Although there are many types of business structures in Australia, there are four main ones commonly used: Sole trader, partnerships, company and trusts.
Sole Trader
A sole trader is a person who operates a business as an individual. This is the simplest form of business structure in Australia. It is easy and inexpensive to set up. It’s often used by tradies, freelancers, shop owners and other small business operators.
However, as a sole trader you are personally liable for any debts, losses or liabilities incurred by the business. There is no legal distinction between you as the owner and the business. This puts your own personal assets at risk.
All profits from the business belong to you and are taxes as part of your individual income. You don’t lodge a separate tax return for your business.
Partnership
A partnership is a collaborative business structure in which two or more individuals co-own and manage a business. In a partnership, the profits and losses are shared by the partners.
Each partner is jointly and severally liable for the debts incurred in the business so it’s important to carefully consider who you go into partnership with. It’s also a good idea to establish a partnership agreement to clarify the roles, responsibilities, and expectations of each person.
In a partnership, each partner pays tax on the profits distributed to them as part of their individual tax return.
Company
A company is a separate legal entity from its owners and is owned by shareholders. In Australia, there are two types of companies: proprietary limited (Pty Ltd) and public.
A Pty Ltd company is the most common type of company in Australia, and it is typically used for small to medium-sized businesses.
A public company is a type of business structure that can secure funding from the public and is permitted to have over 50 non-employee shareholders.
One of the key advantages is that all debts and liabilities are limited to the company’s ownership.
A company is subject to more regulations and reporting requirements than a sole trader or partnership. Companies must lodge their own tax return and pay company tax.
Trust
A trust is a business structure where a trustee holds and manages assets for the benefit of the beneficiaries. Various trust structures are available, such as discretionary trusts, unit trusts, and hybrid trusts. Trusts are often used for investment purposes or to protect assets from creditors. Trusts can be complex and require professional advice to set up and manage effectively.
Factors To Consider When Choosing A Business Structure
When choosing the right business structure for your growing business, consider the following factors:
Liability: The business owner should consider their personal liability for business debts and legal obligations. Some structures offer limited liability, protecting personal assets in the event of business failure or legal issues.
Taxation: Choosing the right structure can save you considerable amounts of tax. Take into account income tax, capital gains tax, and GST obligations.
Complexity and Cost: Each structure has different requirements which impact legal fees, ongoing compliance costs, and record-keeping expenses.
Ownership and Control: The structure should reflect the ownership and control preferences of the business owner, including the number of owners, the level of involvement, and the ability to sell or transfer ownership.
Industry Regulations: Specific structures may be required by law in certain industries.
Growth Potential: If you plan on expanding your business, consider a business structure that allows for more flexibility and easier access to capital.
Personal Circumstances: Finally, personal circumstances, including personal income, asset protection, and estate planning considerations, should be factored into the decision.
Business Structure Overview
Sole Trader | Partnership | Company | Trust | |
Is the structure hard to set up? | No | No | Yes | Yes |
Is it expensive to set-up? | No | No | Yes | Yes |
Do I have complete control? | Yes | No | No | No |
Are there complex reporting requirements? | No | No | Yes | Yes |
Are my assets under threat if my business goes into debt? | Yes | Yes | No | No |
Do I receive full profits made from the business? | Yes | No | No | No |
Can I employ staff? | Yes | Yes | Yes | Yes |
Can I change the legal structure easily? | Yes | Yes | No | No |
Is it easy to raise capital? | No | Yes | Yes | Yes |
Is it easy to dissolve or exit? | Yes | Yes | Yes | No |
What Is The Difference Between Pty Ltd And Ltd In Australia?
In Australia, Pty Ltd and Ltd are two types of business structures used by companies, and the main difference between them is in their legal requirements and regulations.
- Pty Ltd stands for “proprietary limited” and is a private company limited by shares. This type of company can have up to 50 non-employee shareholders, and its shares cannot be publicly traded on the stock exchange. A Pty Ltd company is often used by small and medium-sized businesses.
- Ltd stands for “limited” and is a public company limited by shares. Unlike Pty Ltd companies, Ltd companies can have an unlimited number of shareholders, including both employees and the general public. They are also allowed to offer their shares for public trading on the stock exchange. Ltd companies are often larger and more established businesses.
Pty Ltd | Ltd | |
Legal Status | Private Company | Public Company |
Shareholders | Limited to 50 non-employee shareholders | No limit on shareholders |
Ownership | Privately owned | Publicly owned |
Minimum Number of Directors | One | Two |
Australian Resident Director Requirement | At least one | At least one |
Name Requirements | Must include “Pty Ltd” | Must include “Ltd” or “Limited” |
Disclosure Requirements | Must disclose financial reports to ASIC and shareholders | Must disclose financial reports to ASIC, shareholders, and the public |
Legal Obligations | Less strict than for public companies | More strict than for private companies |
IPO Potential | Not suitable for initial public offerings | Suitable for initial public offerings |
Financial Transparency | Limited financial transparency | High financial transparency |
Cost of Incorporation | Lower than for public companies | Higher than for private companies |
How Is An LLC Treated In Australia?
In Australia, the term LLC (Limited Liability Company) is not used. Instead, a similar business structure is called a proprietary limited company (Pty Ltd). Pty Ltd companies have limited liability, which means that the company’s shareholders’ liability is limited to the amount of unpaid shares they hold in the company. This is similar to the limited liability provided to members of an LLC in other jurisdictions.
However, Pty Ltd companies are subject to different regulations and laws in Australia compared to LLCs in other countries. For example, the Australian government requires Pty Ltd companies to have at least one director who is an Australian resident, and they must maintain proper financial records and register for an Australian Business Number (ABN).
To guarantee the long-term success of your growing business, it is essential to choose the right business structure.
Carefully consider factors such as growth potential, tax implications, and liability exposure before making your decision.
And seek the advice of an accounting and tax professional, like Allevi8HQ, which can help you determine the optimal structure for your business and position it for future growth. Feel free to contact us for more information
