The Four Most Common Business Structures

How you set up your business structure from the beginning is an important consideration. When you decide on a structure for your business, choose the one that best suits your business needs. Consider each option carefully as there are key factors and rules to consider for each structure.

The four most common types of business structures as described on Business.Gov.Au are:

+ SOLE TRADER – the simplest structure, gives you full control⠀

  • Is simple to set up and operate

  • Gives you full control of your assets and business decisions

  • Requires fewer reporting requirements and is generally a low-cost structure

  • Allows you to use your individual tax file number (TFN) to lodge tax returns

  • Doesn’t require a separate business bank account, although this is recommended to make it easier to keep track of your business income and expenses

  • Requires you to keep financial records for at least 5 years

  • Has unlimited liability and all your personal assets are at risk if things go wrong

  • Doesn’t allow you to split business profits or losses made with family members

  • Makes you personally liable to pay tax on all the income derived

+ PARTNERSHIP – made up of 2 or more people who distribute income or losses⠀

There are 3 main types of partnerships:

  1. General Partnership – where all partners are equally responsible for the management of the business, and each has unlimited liability for the debts and obligations it may incur.

  2. Limited Partnership – made up of general partners whose liability is limited to the amount of money they have contributed to the partnership. Limited partners are usually passive investors who don’t play any role in the day-to-day management of the business.

  3. Incorporated Limited Partnership – where partners in an ILP can have limited liability for the debts of the business. However under an ILP there must be at least one general partner with unlimited liability. If the business cannot meet its obligations, the general partner (or partners) become personally liable for the shortfall.

  • Are relatively easy and inexpensive to set up

  • Have minimal reporting requirements

  • Require separate tax file numbers (TFN)

  • Must apply for an Australian Business Number (ABN) and use it for all business dealings

  • Share control and management of the business

  • Don’t pay income tax on the income earned – each partner pays tax on the share of the net partnership income each receives

  • Require a partnership tax return to be lodged with the Australian Taxation Office (ATO) each year

  • Require each partner to be responsible for their own superannuation arrangements

  • Must register for GST if turnover is $75,000 or more

+ COMPANY – more complex, limits your liability because it’s a separate legal entity⠀

  • Is a separate legal entity

  • Is a more complex business structure to start and run

  • Involves higher set up and running costs than other structures

  • Requires you to understand and comply with all obligations under the Corporations Act 2001

  • Means that business operations are controlled by directors and owned by the shareholders

  • Means company members have limited liability

  • Means the money the business earns belongs to the company

  • Requires an annual company tax return to be lodged with the ATO

  • Requires you to complete an annual review and pay an annual review fee

  • Directors are required to compete a declaration of solvency each year

  • Means wider access to capital

And remember;

  • Your company must register for goods and services tax (GST) if your turnover is $75,000 or more. The registration threshold for non-profit organisations is $150,000

  • The Australian Tax Office (ATO) has more detailed information on your obligations as a company

  • Companies and directors have key legal and reporting obligations they must comply with. Some of the more common obligations include:

+ Update ASIC within 28 days of key changes to company details

+ Keep financial records

+ Understand and comply with all your obligations as a director

+ TRUST – where a trustee is responsible for business operations⠀

  • Can be expensive to set-up and operate

  • Require a formal trust deed that outlines how the trust operates

  • Require the trustee to undertake formal yearly administrative tasks

Your business structure can determine:⠀

+ The license you require⠀
+ How much tax you pay⠀
+ Whether you’re considered an employee, or the owner of the business⠀
+ Your potential personal liability⠀
+ How much control you have over the business⠀
+ Ongoing costs and volume of paper work for your business⠀

You can change your business structure throughout the life of your business. As your business grows and expands, you may decide to move to a different type of business structure.⠀ is a fantastic resource for business owners which explains all the different business structure types listed above in further detail. Click the link here for more information.

Before deciding which business structure to use or for re-structuring your existing business, seeking professional advice can help. You can use a business adviser, accountant or commercial lawyer.

At Litton Legal, we love working with startups to legal proof your business from the get go. If you need assistance setting up your business, let’s chat.

Head to our contact page here to get in touch with our commercial legal team.