Choosing a Business Structure

There are three main types of business structure used by Australian business – sole trader, company and partnership. So which one is right for your business?

Be sure to investigate each option carefully, as there are distinct advantages and disadvantages for each.

Sole Trader
Being a sole trader means just that – it’s only you.

Advantages

• control – the owner has complete control over the business
• simplicity – it is relatively easy to start and operate
• inexpensive – organisational and compliance costs are minimal

Disadvantages

• unlimited liability – the owner is personally liable for any business debts and obligations
• limited ownership – sole trading is limited to one owner
• tax rate – the owner continues to pay tax on business income at the relevant personal tax rate

For its ease and simplicity, being a sole trader can be very appealing, but be sure to check out any taxation implications relevant to your situation with your accountant.

Partnership
A partnership is where two or more people agree to join together to conduct a business.

Advantages

• multiple owners – more than one person can own and operate the business
• simplicity – a partnership is easy to form and operate
• inexpensive – start up organisational and compliance costs are generally less expensive than setting up a company

Disadvantages

• unlimited liability – each partner could be personally liable for the debts and obligations of the partnership
• ease of dissolution – the partnership agreement dissolves on the death or withdrawal of a partner, unless safeguards are in place
• each partner can be an agent of the partnership – any partner can sign contracts, take out loans, and make other business decisions that may be binding on the entire partnership

To avoid any confusion over responsibilities and equity holdings, it is strongly recommended that a solicitor is engaged and a written agreement drawn up before entering a partnership arrangement.

Company
Not to be entered into lightly, the regulatory obligations around forming a company can be substantial.

Advantages

• multiple ownership – there can be any number of shareholders
• generally, transfer of ownership can be facilitated with ease
• continued existence – the death or withdrawal of members does not affect the continued existence of the company

Disadvantages

• highly regulated – a company must strictly follow legal formalities to begin its existence and to maintain its company status
• directors’ obligations under company law can be substantial
• administration – company administration and compliance can be complicated and time consuming
• cost – forming a company can be expensive, as can the ongoing administrative costs of accounting and tax preparation

Again, do see your accountant or solicitor before embarking upon this form of business structure.

Other business structures
Other business structures include trusts (popular for tax planning purposes), associations (usually for non-profit groups) and cooperatives (member owned and must consist of five or more people).

There’s no doubt there’s a lot to consider when selecting the most appropriate business structure. Factors such as taxation, personal financial liabilities and set-up costs must be taken into account, along with your future business plans. Remember, do seek advice from your accountant and/or solicitor. Getting it wrong can prove costly, while getting it right can mean you’re at the starting block of planning a successful business.

Important information about advice
As this advice has been prepared without considering your objectives, financial situation or needs, you should, before acting on the advice, consider its appropriateness to your circumstances. View our Financial Services Guide (PDF 59kb).