When setting up your business, you will need to determine what type of structure your business will be set up as. There are four main structures in Australia.
Determining what structure your business is set-up as has pros and cons for each option. Choosing the right structure comes down to what your needs are for your business and how you wish to operate it.
The four business structures you can choose in Australia are:
In this guide we will be covering the first three options as well as the stages of growth in your business and why they are important to considering your businesses structure.
A Trust is less common and if you are starting out, one of the other three options will likely suit you. Having said that, it is important that you seek advice from your accountant before you make up your decision.
Don’t have an accountant? Use our guide to finding an accountant for your business.
The business structures will be covered below but first we need to understand what the stages of business are to understand the right structure for your business.
What are the growth stages of Business?
Having a well thought out plan for not only right now but all the way to the end of your involvement in the business will also determine how your business should be set up.
Your business structure should also work for you no matter what stage of your business you are in.
The most common stages of business are:
All businesses start with an idea. It is within this stage where ideas start to become a reality and is the beginning of your journey.
It is usually the highest risk stage as a lot is on the line to make the business work after thorough testing. It is risky because the start-up needs to try and capture their customer base whilst still being adaptable according to initial customer feedback. Cash burn out is a common problem where business owners may not fully realise the requirements to keep the business running.
Cash flow among other reasons is why 80% of all start-up businesses fail in the first 18 months.
This stage of the business can be the most exciting for new entrepreneurs as it signifies the growth past start-up phase. Even though income may still be tight, in this stage your ability to gain new customers and cash flow is slowing getting better.
Your business should have steady cash flow as well a solid presence in your target market. You will also have a loyal customer base. Everything is well established within your business and people within your business will have predictable daily routines.
It is within this stage that focus must remain on the big picture of further growth and expansion. New ideas and open minds must be maintained to continue to adapt and grow.
You’re at a stage where you can consider growing into new markets and distribution channels. Rapid growth in revenue can often be observed.
The entrepreneur will no longer need to focus on the smaller things and the hard work will likely have paid off with benefits too.
Succession/ Exit Stage
All great things always come to an end. This is the stage where you must consider what your involvement in the business will now look like.
With the stable sales growth over the years and expansions, the operations have gotten complex. The CEO has to think in both short and long term for important decisions.
Do you continue to be involved until the end of time or do you sell your shares and retire? Or perhaps the business will remain in the family and passed down to later generations.
These are the decision that the owner needs to make.
Every business growth phase brings with it a set of new challenges which require the business to adapt to.
The business stages are most commonly run in sequential order however not all businesses will have the same journey. In many cases, a start-up may experience rapid growth immediately and some companies could even exit early.
We highly recommend that you seek advice on the right structure for your business before you start with your accountant. They will help you sort out your financials.
What is the Right Business Structure for my Business?
Determining the best structure for your business comes down to what you want out of your business. We have looked at the growth stages of a business.
The next step is to ensure you have a good idea of your businesses financials. You likely wont know exact numbers so rough projections are fine.
Use our free Startup Costs, Profit & Loss Forecast and Break Even Calculator to work out your businesses financial details.
Having these will help to clarify what risks there may be and whether there are any tax benefits for setting up the business in one way or another.
So what are the structures you can have for your business?
The most common ones are:
Sole Trader Structure
A sole trader business structure is where a person trades as the individual legally responsible for all aspects of the business. They are responsible for all debts and losses in the business and cannot be shared with other people.
The reason why sole trader is so popular is because it is by far the simplest and least expensive business structure to choose when setting up a business.
You will be in charge of all the decisions in starting and running your business.
Key Aspects of a Sole Trader Structure
- Is simple to setup, costs less and has less administrative requirements.
- You have full control of the business. No one else can legally control the business. Though employees are allowed to be hired to run the business.
- You are personally liable for all business debts. If you are unable to pay these debts then you can go bankrupt. Additionally, if you make a lot of money then you cannot split the profits with family members to reduce your tax.
- When it comes to tax, your businesses income is combined into your own personal income. You do not have to pay separate business tax like a company would.
- If you plan on seeking additional investment or selling, you can do that by converting the business into a Company structure.
A Partnership business structure is very similar to a sole trader structure except there will be a number of people who carry out the business together. Partnerships can have up to 20 people all as the owners. They have shared control and management over by each of the partners involved.
Partnerships are governed by the law depending on your state or territory.
Key Aspects of a Partnership Structure
- You and your partners all have shared control and management of the business.
- Just like the Sole Trader structure, you are personally liable for all business debts.
- Income is taxed as personal income however each of the partners will share the net partnership income you each receive.
- Requires a separate Tax File Number (TFN), an Australian Business Number (ABN) and partnership tax return to be lodged with the Australian Taxation Office (ATO) each year.
- Additional investment can be obtained at a later date by converting to a company structure but is more difficult to attract investors in a partnership structure.
- Usually more difficult to sell the business compared to a Company structure.
A company structure is set up as a separate legal entity. Companies are different to sole trader and partnership structures because they are separate entities.
Companies have the same legal rights as a person and can incur debt, sue and be sued. The shareholders who own the company are able to limit their own liability from the company and are generally not liable for company debts.
There are higher set-up and administrative costs because of additional reporting requirements and complexities of a business.
Company officers and directors must comply with legal obligations under the Corporations Act 2001. You also need to register a company with the Australian Securities and Investments Commission (ASIC).
Key Aspects of a Company Structure
- The business can either be controlled individually or shared by multiple shareholders of the company.
- Unlike other structures, it has limited liability.
- Is more complex to setup and run and costs more to do so too.
- Income earned by the company belongs to the company as it is a separate entity. An annual company tax return has to be lodged with the ATO.
- The company can seek additional investment by selling shares in the company to new shareholders.
- A company structure is the easiest to sell.
Discuss the Right Structure With Financial Advisor
Depending on what you want your business to do for you will determine the structure. There are a number of factors that you must consider.
Your businesses structure must:
- Maximise your asset protection – No matter if you are in a high risk business or not, your structure must be able to protect everyone involved. A company structure might suit some businesses better as it is considered a separate entity and you are not personally liable for the business debts.
- Allow you to add new partners at a later date – Should you wish to scale your business to include more people owning the business than just you then a business structure may need to be changed at a later date to accommodate.
- Allow you to take advantage of Discount Capital Gains Tax concessions – Small businesses have access to capital gains tax concessions. Your accountant will be able to help you with these.
- Minimise tax – The structure you choose must be the most effective to minimising your tax liabilities. It may not make sense if you are earning several million on a sole trader structure as you will have to pay the highest personal tax rate. Whereas a company has a fixed tax rate.
- Reflect the business profitability and viability – If the business is not overly profitable or viable then it could be a good idea to set the business up as a sole trader. Once the idea has been proven, it can be turned into a company if required.
Is the structure clear?
Once the structure has been decided and everything looks right, you will want to set up your business.
Your businesses structure has an impact on both your day-to-day operations, the amount of taxes you have to pay and how liable you are in the company. Choosing a business structure comes down to the right balance of legal protection and benefits for you.
Has this guide been helpful for you? let us know in the comments below what the reason was for you to choose your business structure.