Choosing the right business structure is a critical decision that can be the difference between success and failure for your business, as each structure is treated slightly different legally, and by the tax office.
The most common business structures in Australia include a sole trader, partnership, company and trust. Each of these coming with different risks and tax obligations. The Australian Government provides the following definition for business structures:
- sole trader – the simplest structure, gives you full control
- company – more complex, limits your liability because it’s a separate legal entity
- partnership – made up of 2 or more people who distribute income or losses
- trust – where a trustee is responsible for business operations
So how do you know which one is right for you?
I always ask clients what their ‘why’ is to tease out some core factors because once you set up, it is costly and complex to change from one type to another. “What do you mean?” ‘What’s your why?’ is often my first response. Why are you setting up this business – begin with the end in mind? Are you looking at setting this up for your kids to take over, for someone to purchase in 3-5 years time? to build a big corporate empire or is it more like a hobby? The answer to your ‘why’, will help guide you on how to set up your business.
Here are some important factors to consider when making your decision.
- Legal Liability: Consider your personal liability and the level of protection you require. For example, for sole traders everything rests on their shoulders whereas companies can offer limited liability protection.
- Taxation: Different business structures have different tax implications. For example, sole traders pay personal tax rates, while companies are taxed at a flat rate.
- Complexity: The level of complexity involved in setting up and managing a business structure can vary significantly. Consider your personal capacity and resources for compliance, reporting and administrative responsibilities.
- Growth Potential: Consider your future plans for growth and expansion. Some business structures may limit your ability to raise capital or expand your business.
- Cost: Different business structures have different costs associated with setup and ongoing compliance. Consider your budget and resources when making your decision.
- Professional Advice: Seek advice from a professional business advisor or accountant to help you understand the pros and cons of each structure and make an informed decision.
Starting your own business is daunting and this type of information can be overwhelming. If you need a hand, feel free to reach out to one of our Entrepreneurship Facilitators, funded under Workforce Australia – Entrepreneurship Facilitators Service, to help provide confidential guidance on your specific situation – firstname.lastname@example.org or 1300 249 482.