Which Business Structure Should You Choose for Your Business?

When starting a small business in Australia, one of the first decisions you’ll need to make is what type of business structure to choose.

Each business structure has pros and cons but understanding each of them is the first step toward figuring out which is best for you.

Here, we’re explaining the basics of business structures and their most common types. Let’s begin.

What is a business structure?

Your business structure depends on the size and type of business you have as well as how you’d like to run it. Business structures have an impact on taxes, asset protection, and set-up costs.

Your chosen business structure will help in coming up with a business organisational chart outlining who manages who and who’s responsible for what.

Don’t worry - if you’re not sure about which business structure to choose, rest assured that you are able to change your business structure if it becomes necessary. So, there’s no need to feel like you’re married to the structure you choose from the get-go.

Still, doing your best to choose the right business structure at the start helps with every other choice you’ll need to make when starting out.

How to Create an Organisational Structure for a Small Business

Choosing the right business structure for your small business is the first step in making organisational decisions. Your business structure determines:

• Required licences
• Your tax bracket
• Whether you’re considered an employee or the owner
• How much personal liability you’re taking on
• How much control you have over the business
• Ongoing costs
• The volume of paperwork required to run your business

So, to choose an organisational structure for your business, you’ll need to know the options. Let’s explore them now.

What business structure should I use?

There are four main types of business structures you can choose from as a small business in Australia. These business structures include:

• Sole trader
• Company
• Partnership
• Trust

Other business structures that are less common but which you might consider include:

• Franchising
• Indigenous businesses
• Home-based businesses

For the purposes of this guide, we will focus on the four most common business structures, touching only briefly on the other, less common options.

Sole-Trader

A sole-trader business structure is the simplest and least expensive business structure option. As a sole trader, you’re personally responsible for each part of your business including debts, losses, and everyday business decisions.

A sole-trader business structure:

• Makes things simple and easy to set up and operate
• Gives you total control over business decisions and assets
• Has low costs and fewer reporting requirements
• Allows you to file taxes with your personal TFN
• Doesn’t require a separate business bank account (although it’s recommended)
• Requires financial record-keeping for at least five years
• Means you’re personally liable for losses and your personal assets are on the line
• Doesn’t allow you to split profits or losses
• Allows you to hire employees requiring certain obligations

Partnership

A partnership business structure includes two or more people where the profits and losses are distributed among the partners. There are three different kinds of partnership business structures including:

• General Partnership: All those involved are equally responsible for business decisions and are all equally liable for debts and obligations.
• Limited Partnership: Parties involved are only responsible for the business decision in relation to how much they’ve invested in the partnership.
• Incorporated Limited Partnership: At least one general partner must exist. This general partner or partners are personally liable for debts and obligations incurred.

A partnership business structure:

• Has a relatively easy set-up
• Requires minimal reporting
• Requires separate TFNs to file taxes
• Requires applying for an ABN
• Means control and management is shared among partners
• Means income taxes aren’t paid on income earned, each partner pays on their share of net income
• Requires filing a separate partnership tax return
• Requires each partner to manage their own superannuation
• Requires registering for GST if turnover is $75,000 or more
• May have different requirements based on your state

Company

With a company business structure, your business becomes a completely separate entity from yourself. Different from a sole-trader or partnership business model, companies can incur debt, sue others, and be sued on its own.

So, as a member of the company, you’re not liable for its debts and so forth. However, you can owe a company a debt. Also, directors can still be found personally liable for a company’s bidding.

Companies are complicated to run and expensive to start. They’re generally suited for business owners expecting high viability and who want the option to offset losses and for future profits.

A company business structure:

• Means it’s a separate entity from the individual
• Has a complex and expensive set-up
• Involves higher running costs
• Requires comprehension and compliance with the Corporations Act 2001
• Means the business is controlled by directors and owned by shareholders
• Means limited liability for members
• Means money earned belongs to the company
• Requires an annual company tax return
• Requires an annual review and annual review fee
• Means more access to more capital
• Must apply for GST if turnover reaches or exceeds $75,000 ($150,000 for non-profits)
• Requires more detailed record-keeping

Trust

A trust is an obligation put on another person (known as a trustee) to hold property or assets for the benefit of another person or group (known as a beneficiary).

A trust business structure:

• Is expensive to set up
• Requires formal paperwork in the form of a trust deed outlining the operation of the trust
• Requires the trustee to submit formal administrative paperwork on an annual basis
• Means the trustee is fully responsible for its operations

Other Common Business Structures

A few other ways to set up your business in Australia is as a franchise, as an Indigenous business, or as a home-based business.

Franchising

A franchise allows a business to operate under an established brand. As a franchisee, you can sell a brand’s products and/or services for a specified term in return for payment to the franchiser.

For those looking to start a small business, franchising is an incredible option. It’s a solid alternative to opening a unique business venture as the systems and operations are laid out for you.

Especially if it’s your first time in business, you’ll be more likely to avoid common pitfalls as a franchisee.

Learn more about our unbeatable franchising opportunities at Physio Inq!

Indigenous Businesses

An Indigenous business can be set up using the same business structures listed above. However, Indigenous business owners may be entitled to additional support to develop and build on their business ideas.

Register as an Indigenous corporation through the Office of the Registrar of Indigenous Corporations and learn more about the support you may be eligible for on the Australian Government website.

Home-Based Businesses

Even before the global pandemic forced many business owners to operate from home, home-based businesses have been a popular option for many Australians.

Especially if the products or services you offer require no need for a physical location, home-based businesses can be a smart choice.

Home-based businesses will be set up under one of the business structures listed above. The only difference is that you operate out of your home, requiring some different considerations.

When operating a home-based business, you’ll need to understand what that means in terms of your tax return. For example, if you have a home office, you can write it off as an expense.

However, challenges with work-life balance and building the discipline to get to work while at home can be difficult for many.

Check out the Australian Government website to learn more about preparing to run a home-based business.

Understanding the basics of business structures are an important step towards small business ownership. Again, you can always change your business structure down the line, but you’ll need to be clear on your choice for each step along the way.

Date Published: Tuesday, January 12, 2021
Date Modified: Tuesday, July 16, 2024