Alternative Business Structures

In this blog we are going to examine some of the most popular business structures used in Australia.

Let me say upfront, it’s almost impossible to recommend a particular type of business structure without an understanding of your business, your industry, your family structure and your personal financial situation. For example, when deciding on the most appropriate business structure you need to take into account issues like:

  • Asset protection
  • Tax Minimization
  • The Admission of new partners or investors
  • Compliance with all legal requirements and
  • The Eligibility for future discount capital gains concessions

As such, the choice of business structure is often a compromise based on the relative importance of each of these issues.

So let’s examine the 4 different types of structure, Sole Traders, Partnerships, Companies and Trusts.

Let’s start with Sole Traders.

It’s relatively cheap and quick to establish because you can trade in your own personal name or register a business name. The cost to register a business name is currently $34 for one year or $78 for three years. Basically you operate the business in your own right and there is no legal separation between you and the business. As such, there is minimal asset protection and for tax purposes, the income of the business is treated as your personal income and taxed at individual tax rates.

The second type of structure is a Partnership where two or more persons carry on a business. A partnership can be between individuals, companies or other entities and is governed by state laws. Usually there is a formal partnership agreement that outlines the rules regarding issues like:

  • profit-share arrangements (which incidentally don’t have to be in equal proportions)
  • arrangements for partners’ salaries and
  • the retirement and admission of new partners

A partnership, unlike a Company, has no separate legal personality distinct from its members. As such, each partner is jointly liable for the liabilities of the business and each other’s business actions. It lodges an annual tax return but does not pay tax as the net income is distributed to the respective partners who pay tax in their own right.

The third structure we will examine is a corporate or Company structure.

A company is a separate legal entity distinct from its shareholders who own the company. Companies are granted legal status to enter into contracts and can sue and be sued. They are governed by Corporations Law which is administered by the Australian Securities and Investments Commission.

There are different types of companies but the most common is a company limited by shares. They provide a form of asset protection with limited liability so the personal assets of the individual shareholders are separated from the debts of the company. A company lodges an annual tax return and the profits are taxed at a flat rate of tax. The company tax rate has been 30% for a number of years.

The fourth type of structure to consider is a Trust structure. Unlike a company, a trust is not a separate legal entity. Instead it appoints a “trustee” who is required to undertake all obligations and transactions on behalf of the trust. The role of trustee carries legal liability for the activities undertaken by the Trust so Trustees are often companies to limit liability.

There are several types of trust including a Discretionary Trust or Family Trust where the trustee has the discretion on how the trust income is distributed each year to the qualifying beneficiaries. They don’t have to make income distributions in any set proportion each year so income splitting is a major advantage. Trusts also provide a mechanism to pass family owned assets to future generations.

A Unit Trust is a form of fixed trust whereby each beneficiary (that is a unit holder) is entitled to trust income and trust property, in proportion to the number of units they own. A trust must lodge a tax return and will generally only pay tax if the net income is not distributed to the beneficiaries. Each beneficiary will be responsible for tax in their own right.

Your choice of business structure is very important and to make a recommendation we really need to sit down with you to discuss issues like asset protection, tax minimization and the likely admission of new investors or partners. If you’re looking to start your own business or want to re-structure your existing operation we urge you to consult with us regarding the various types of structures.