Business Structures:  The Key Differences

When starting a business, one of the first decisions you’ll face is choosing the right structure. The most common business structures in Australia are sole trader, partnership, company, and trading trust. Each has its own tax implications, legal responsibilities, and benefits. Understanding the key differences will help you make the best choice for your situation. 

 

SOLE TRADER

A sole trader is the simplest business structure, where you, as an individual, run and operate the business. All profits and losses are directly attributed to you, and you are personally liable for any debts or obligations. 

Tax Considerations: 

• As a sole trader, your business income is taxed as part of your individual tax return.
• The tax-free threshold applies, meaning you won’t pay any income tax on income up to this amount.
• Business expenses are deductible, and profits are taxed at individual tax rates.
• Sole traders are required to pay and claim GST if their turnover exceeds threshold
• Capital gains tax applies for the individual if the sole trader sells assets, but the discount method may apply to reduce gains.
• Fringe Benefits Tax (FBT) may apply if the sole trader provides fringe benefits to employees, but not to the sole operator.

Pros: 

• Simple to set up and manage. 
• Full control over the business. 
• Lower setup and operational costs. 

Cons: 

• Unlimited personal liability, meaning personal assets could be at risk. 
• Limited ability to raise capital. 
• Less tax planning flexibility. 
• Sole operator unable to be insured for workers compensation

 

PARTNERSHIP

A partnership involves two or more people who share control and responsibility for the business. It is relatively easy to set up and operate, with profits and losses shared according to the partnership agreement. 

Tax Considerations: 

• A partnership itself does not pay tax on its income, each partner includes their profit or loss on their individual tax return.
• Partners are taxed at personal income tax rates, and each partner’s share of the profit is considered taxable income.
• If the business has a turnover above threshold, it must register for GST.
• Capital gains tax (CGT) applies for partners on the sale of assets, with potential discounts and indexation available.
• Fringe Benefits Tax (FBT) may apply if the partnership provides fringe benefits to employees, but not to partners.

Pros: 

• Relatively simple and inexpensive to set up. 
• Shared responsibility and expertise. 
• Flexibility in profit-sharing arrangements. 

Cons: 

• Unlimited personal liability for all partners, meaning personal assets could be at risk. 
• Potential for disputes between partners. 
• Profits are taxed individually, which could result in higher tax rates for higher earners. 
• Partners unable to be insured for workers compensation

 

COMPANY

A Company is a separate legal entity from its owners (shareholders). It offers limited liability protection, meaning your personal assets are generally protected from business debts. However, it comes with additional legal and regulatory responsibilities. 

Tax Considerations: 

• Companies are taxed separately from their owners at a flat company tax rate.
• Companies are subject to annual reviews by the ASIC, and must keep accurate financial records.
• Companies are also subject to GST if their turnover exceeds threshold.
• Capital gains tax applies to companies when assets are sold, companies can access certain CGT discounts.
• Fringe Benefits Tax (FBT) may apply if the company provides fringe benefits to employees. 

Pros: 

• Limited liability protects personal assets. 
• More opportunities for raising capital through shares. 
• Potential to access lower corporate tax rates. 

Cons: 

• Higher setup and ongoing compliance costs. 
• More complex accounting and regulatory requirements. 
• Profits are taxed at the company level, and dividends paid to shareholders may be subject to additional tax. 

 

TRUST

A Trust is a trust set up to operate a business, where the trustee manages the business on behalf of beneficiaries. This structure combines elements of a company and a trust, with the added benefit of asset protection and tax flexibility. 

Tax Considerations: 

• A Trust does not pay tax on its income, the income is distributed to the beneficiaries and taxed at individual rates.
• Trusts can distribute income potentially allowing for income splitting across beneficiaries in lower tax brackets.
• Capital gains tax applies for beneficiaries if the trust sells assets, the discount method may apply to reduce gains.
• Trusts are subject to GST if turnover exceeds threshold.
• Fringe Benefits Tax (FBT) may apply if the trust provides fringe benefits to employees. 

Pros: 

• Flexible income distribution to beneficiaries, which can be tax-effective. 
• Provides asset protection, as assets are owned by the trust and not by the beneficiaries. 
• Can be used for succession planning or distributing income across family members. 

Cons: 

• More complex to set up and manage. 
• Trustees have a fiduciary responsibility and must comply with trust deed obligations. 
• Ongoing administrative costs and regulatory requirements. 

 

CHOOSING THE RIGHT STRUCTURE

Each business structure—sole trader, partnership, company, or trust—offers unique tax benefits and challenges. The choice depends on factors such as the size of your business, your liability preferences, and your future goals. 

• Sole Trader: Suited to small, low income, low risk businesses with simple operations, where there are nil or minimal personal assets exposed. 

• Partnership: Suited to businesses with multiple owners who want to share responsibility and profits, where there are nil or minimal personal assets exposed. 

• Company: Suited to larger businesses looking for liability protection, tax planning opportunities, and overall presentation for marketing purposes. 

• Trust: Suited to businesses wanting more asset protection, the ability to split income across beneficiaries for tax minimisation purposes, and overall presentation for marketing purposes. 

 

Need help structuring your business?

Choosing the right business structure can be a complicated decision, and it’s crucial to get it right from the start. Whether you’re just starting out or thinking about restructuring your existing business, our team of experts can guide you through the process and help you understand the tax implications of each option. 

At Minnik Chartered Accountants, we offer tailored consultations to ensure you choose the best structure for your goals, helping you maximise tax savings, minimise risks, and position your business for growth. We can also assist with setting up the necessary frameworks and ensuring your ongoing compliance. 

Book a Free Consultation, and let’s take the next step towards building a successful and tax-efficient business.