How to choose the right business structure
Your business structure decides how much tax you pay, who’s responsible if things go wrong, how much the paperwork costs, and how easily you can bring in partners or sell later. It’s worth getting right at the start, and worth revisiting as the business grows.
There are four main options.
Sole trader
You run the business as yourself, under your own ABN. Profit is taxed at your personal rates, and you’re personally liable for everything the business owes.
Suits: someone starting out, testing an idea, or running a low-risk business on their own.
Watch out for: unlimited liability, and paying tax at your top marginal rate once profit grows. Our article on when to switch from sole trader to company covers the tipping point.
Partnership
Two or more people run a business together and split the profit, which each partner reports on their own tax return. Each partner is generally liable for all the partnership’s debts, including those run up by the other partners.
Suits: professional practices and family businesses where people share the work and the risk.
Watch out for: joint liability, and what happens when a partner wants out. A written partnership agreement covering profit shares, decision-making and exit is essential.
Company
A separate legal entity, owned by shareholders and run by directors. A small company pays 25% tax on its profit, and shareholders pay tax on dividends (with franking credits for the company tax already paid).
Suits: growing businesses, businesses with real liability exposure, and anyone who wants to reinvest profit or bring in investors.
Watch out for: higher running costs, ASIC obligations and director duties. Money in the company isn’t yours to spend; taking it out the wrong way can trigger Division 7A, which treats loans to shareholders as unfranked dividends.
Trust
A trustee (often a company) runs the business for the benefit of beneficiaries, usually family members. Each year the trustee decides how to distribute the profit, which lets income be shared across the family.
Suits: family businesses, and families who want asset protection and flexibility over who receives income.
Watch out for: distribution resolutions must be made by 30 June each year, the ATO scrutinises trust distributions closely, and losses are trapped in the trust. Trusts can’t retain profit at a low rate the way a company can.
The questions that decide it
How much risk does the business carry? Trades, construction, health and anyone taking on big contracts should think hard about protection.
How much profit, and how much do you need to live on? The more profit you can leave in the business, the more a company or trust saves.
Who’s involved? Family members, a business partner, or future investors all point to different structures.
What are your plans? Selling the business, passing it to the next generation, or buying property through it all affect the answer.
What can you manage? More sophisticated structures mean more administration and higher accounting fees. Our business packages are the same price for companies and trusts.
Getting it wrong is expensive
We regularly meet business owners who are paying more tax than they need to, carrying risk they didn’t know about, or facing a costly restructure because the original structure was chosen in a hurry. Advice at the start costs far less than fixing it later.
Our first consultation is free and runs up to an hour. Bring your numbers and your plans, and we’ll tell you which structure fits and why.