When deciding upon a structure for your business, it is critically important to choose the one that best suits your business needs in accordance with your business projections. The differences between the four main business structures can affect your businesses operation significantly. Businesses can also set up an ideal structure by combining different types of business structure to achieve stronger protection of your asset and flexible income flow distribution. Obtaining tailored professional advice can assist businesses to understand their own particular circumstances better.
Types of structures
There are a number of structures that you can choose from when setting up your business. The four main types of business structures commonly used by small businesses are:
Sole trader: an individual trading on their own
Partnership: an association of people or entities running a business together, but not as a company
Company: a legal entity separate from its shareholders.
Trust: an entity that holds property or income for the benefit of others. Most commonly used trusts are Family Trust and Unit Trust
There are many different types of trust structures including discretionary family trusts, unit trusts and hybrid trusts. The most common type of trust is the discretionary trust. If you’re the trustee of a discretionary trust, you have the power to decide how the profit will be distributed among the beneficiaries. All trusts operating as a business must hold an Australian Business Number (ABN) and Tax File Number (TFN).
From a tax perspective, the main advantage is that any income generated by the trust from business activities and investments, including capital gains can be distributed to beneficiaries in lower tax brackets (often spouses or children). Because the trustees of the trust have the “discretion” to distribute income and capital as they see fit – and no beneficiary has a fixed entitlement to receive anything – the trustees are able to “stream” income in a tax effective way on a year to year basis. The downside is that to the extent that they don’t distribute the income of the trust, the trustees themselves are liable to tax on the undistributed income – and a rate of tax usually higher than the beneficiaries themselves would have to pay. Note also that there are limited circumstances when the trustee has to pay tax on behalf of certain beneficiaries, the most common ones being where beneficiaries are children under the age of 18 or people with certain disabilities.
In most cases, from an asset protection perspective, assets held in a family trust cannot be attacked by creditors or lawsuits so they are ideal for protecting assets from business or personal disputes and they can also facilitate the transfer of assets from generation to generation tax free.
If you operate your business as a sole trader, although you may decide to have employees, you trade, control and manage all aspects of your business on your own. A sole trader must hold an Austrian Business Number (ABN) and Tax File Number (TFN). This is the simplest business structure available because of the minimal legal and tax formalities.
If you operate your business as a partnership, you’re carrying on your business with one or more other people as partners and receiving your income jointly. In a partnership, all partners share the resources and risks of the business. Partnership must have an Australian Business Number (ABN) and Tax File Number (TFN).generation to generation tax free.
If you operate your business as an incorporated company, the business is a distinct legal entity that is regulated by the Australian Securities and Investment Commission (ASIC). A company is a more complex business structure. A company must hold an ABN number and Tax File Number.