When setting up an overseas business in Australia, you’ll need to decide what business structure to use for your company. Choosing the right business structure is not just a formality. It has significant implications for your tax rates, legal obligations, protection against liability and ability to raise capital.
In this article, we will take a look at the most common Australian business structures. We’ll discuss the benefits and drawbacks of each from a legal perspective to help you choose what might work best for your needs.
What are the four types of business structures?
A business structure is the legal framework within which your business will operate. It influences factors such as how much tax you pay, personal liability, and legal obligations.
The most common structures are sole traders, partnerships, companies, and trusts. There are several key differences between each business structure you’ll need to keep in mind when starting a business:
A sole trader is the simplest type of business structure in Australia. A sole trader is a person who is the sole owner of the business. That means you control all aspects of the business, from day-to-day operations to strategic decision-making.
As a sole trader, you’re free to employ people to work for you. However, you cannot hire yourself. This means any profits or losses generated on behalf of the business will be yours alone. You are also solely responsible for any liabilities your business incurs, and will be the defendant in any legal proceedings involving your business.
When you employ staff to work for you, they’ll be entitled to superannuation. Businesses are required to contribute 10.5% of an employee’s income towards their retirement. You’ll be obligated to pay your employees’ superannuation at least four times a year to avoid being penalised.
A partnership is a legal structure between two or more people who agree to run a business together. Partnerships are relatively easy and inexpensive to establish. Each partner shares in the profits and losses of the business and has joint liability for company debts.
You and your partners will need to determine how profits and losses will be shared among you. You’ll also have to agree on how the company’s day-to-day operations will be managed and what will happen if one of you can no longer work in the business or wants to leave. To do so, you may draft a formal partnership agreement. However, this is not required by law.
Although not legally required, a written partnership agreement can be helpful in conflict resolution. This is especially true if business profits and losses aren’t equally split between partners. For example, one partner may choose to invest more than the others. Hence, they may want to receive a larger share of the company’s earnings.
A company is a separate legal entity from its owners. This means a company can enter into contracts, own business assets and incur debt in its own name. A company has shareholders who own shares in the company. The shareholders appoint directors to manage the company on their behalf. All Australian companies must be registered with the Australian Securities and Investments Commission (ASIC). There are different types of companies, including public and proprietary companies.
Public companies can be listed on the Australian Stock Exchange and raise funds by offering shares to the general public. Private or proprietary companies are not listed on the stock exchange, and their shares can only be held by private investors.
A trust is an arrangement where a trustee holds property on behalf of beneficiaries. The business may appoint either an individual or a corporate trustee.
The main advantage of using a trust structure is that it can provide asset protection. Also, there is more flexibility in how the trust’s income is distributed to the beneficiaries. So you can take advantage of the differing favourable tax treatment of different classes of beneficiaries. Trusts are also transparent for tax purposes and can offer some estate planning benefits.
However, trusts are generally more complex and expensive to set up than other business structures. The trustee must comply with the terms of the trust deed, which sets out the rules governing the trust. The deed will usually state the purpose of the trust, how it is to be managed and who can benefit from it. Trustees will also have ongoing administrative duties every year, and there are rules about whether and how much profit a trust can retain.
What are the advantages and disadvantages of each business structure?
Each business structure has its advantages and disadvantages. So it’s important to understand what each one entails before making a decision. What is set out below are some advantages and disadvantages of each structure. Still, it is not an exhaustive list, and you may wish to consider getting professional advice before choosing the best structure for your business.
Compared to other business structures, being a sole trader is relatively simple and straightforward. You are in complete control of your business. You’ll keep the full profits generated by your business and won’t have to answer to anyone else. This can be a big advantage if you’re the type who likes to make all the decisions yourself.
However, there are also some downsides to being a sole trader. One of the biggest is that you are personally liable for all debts and losses your business incurs. This means if your business goes into debt, you could lose your personal assets, such as your home or car.
Another disadvantage of being a sole trader is that it can be harder to raise money. Investors or lenders may be less willing to lend money to a business that isn’t incorporated.
A partnership can be a great way to run a business, especially if the partners have complementary skills and knowledge. One of the main advantages of being in a partnership is that you can pool your resources and expertise to make your business more successful. Having someone to bounce ideas off and share the workload can also make running a business more enjoyable.
However, there are also some potential downsides to a partnership business structure. One of the biggest is that you are legally responsible for the actions of your partner (or partners). This means if your partner incurs debts or losses, you could be held liable.
Another thing to consider is that partnerships can be quite complex, especially if multiple partners are involved. This can make decision-making and communication difficult, which can lead to disagreements and conflict.
As a separate legal entity, companies have limited liability. This means shareholders are not personally liable for the debts and losses of the company. This can provide peace of mind for shareholders, knowing that their personal assets are protected should something go wrong.
Another advantage of companies is they can often raise money more easily than other types of businesses. That’s because investors are often more willing to lend money to a company than, say, a sole trader or partnership. Public companies can also offer shares to the public, which can provide a source of capital.
However, there are also some disadvantages to operating as a company. One of the biggest is that companies must comply with more regulations. This can
be costly and time-consuming, especially for a small business.
Lastly, depending on how it’s structured and the number of shareholders, shareholders may have less control over the company than they would if they were running the business themselves.
There are a few key advantages of running your business as a trust. One is that trusts can be used to minimise tax liabilities. This is because in general, the net income earned by the trust is taxed in the hands of the beneficiaries (or the trustee on their behalf) based on their share of the trust’s income, regardless of when or whether the income is actually paid to them. Trusts can also be used to manage assets and protect them from creditors.
However, there are also some disadvantages to trusts. One is that they are a complex business structure to set up and run. This means that it’s important to get professional advice if you’re thinking of setting up a trust.
Trusts also have strict rules about how they must be operated, which can be restrictive for some businesses. Finally, trustees can be held personally liable for the debts and losses of the trust.
How do I choose a business structure for my business?
There’s no one-size-fits-all answer to this question. Choosing the right business structure depends on your individual circumstances. However, there are a few things to consider that will help you choose the right business structure for your business.
First, think about what kind of business you want to operate. Are you looking to start a small business, or a larger national or international business? This will help you determine which business structure is better suited for your needs.
Then, consider how each business structure affects the way you pay tax. Different structures have different tax consequences. It’s important to choose one that minimises your tax liability.
Finally, think about the legal and regulatory requirements of each type of business structure. Make sure you are familiar with the requirements of the structure you choose, and that you’re able to comply with them.
If you are bringing your business to Australia, you should read our guide to foreign businesses setting up in Australia.
What happens if I change my mind about my business structure later on?
As your business grows and evolves, you may find that your current business structure no longer suits your needs. Changing your business structure is generally a straightforward process, but there are a few things you need to keep in mind. First, you’ll need to notify the Australian Taxation Office (ATO) of your change.
You may be required to update/change existing business registrations, such as your ABN or GST registration. You’ll also need to let your employees know, as their tax and your superannuation obligations may change. Finally, you’ll need to update your contracts and other legal documents to reflect your new business structure. You may also need to organise for a transfer of the business assets into the new structure, which should only be done after receiving tax advice.
If you’re thinking of changing your business structure, it’s a good idea to seek professional advice so you understand all the implications of the business changes. As lawyers, we can ensure you comply with the necessary legal requirements.
Elevate your business with a structure that’s right for you
When choosing a business structure for your business, you’ll need to consider your goals for the business. You’ll also need to consider the amount of risk you’re willing to take on and how you want to pay tax. Every business structure has its own regulations and requirements that you must comply with, and the tax implications vary depending on individual circumstances.
So it’s important to do your research before making a decision.
Make your choice with confidence
This post gives you a general view of business structures in Australia from a legal perspective. It does not address the tax implications. However, the situation can change at any time. You should not, therefore, rely on this article as specific to your situation, current or exhaustive.
We’re happy if this article has helped you, but downloading or reading this doesn’t create a solicitor and client relationship between us. Instead, we would welcome the chance to talk to you to see if forming that relationship would be appropriate in your situation.
If you’re unsure which structure is right for you or have other questions about setting up a business in Australia, contact us for help. We can guide you through the process and ensure your business is set up for success in Australia.
About Fiona Henderson
Fiona Henderson is an experienced Australian lawyer specialising in establishing business operations in Australia for overseas companies, as well as litigation and dispute resolution matters. Fiona’s advice is highly regarded by growing businesses in the USA, Germany, Austria, Switzerland, Norway, Italy and elsewhere who need an experienced lawyer and advisor to represent their interests in Australia. She regularly acts as their Australian resident director.
The Australian legal system is distinct from the legal systems many of her clients are accustomed to, which is why clients appreciate Fiona’s ability to anticipate and explain the sometimes surprising differences.