How should I set up my business? Business Structures 101

 

27 June 2017
Posted by Suzy Wood

Are you wanting to set up a new business but have no idea how?  The first step is choosing the right business structure for you. If the words ‘proprietary limited’ and ‘unit trust’ have been keeping you awake at night and you don’t know how to answer the question ‘What’s your trading entity?’, this blog is for you.

Tell me about… Why it matters

The legal structure you choose will affect the way various laws apply to your business, what tax you pay, how your assets are protected, your operating costs and how other businesses deal with you.  In this blog, we will give you the low-down on key structures used in Australia (companies, sole traders, partnerships and trusts).

Tell me about… Setting up a pty ltd company

‘Pty Ltd’ companies are commonly used in Australia to operate private businesses.  They are distinct legal entities that are regulated by ASIC and have at least one shareholder and one director.

A key advantage of a pty ltd company is that because it is its own legal entity, the personal assets of its directors and shareholders are generally protected.

Generally speaking, unless there has been fraud or the director allowed the company to trade insolvent, the director will not be responsible for the company’s losses. If it runs into financial strife, the company may be wound up and the director will not be personally responsible to creditors. The liability of shareholders for the debts of a pty ltd company will similarly be limited, to the amount payable for their shares. If their shares are fully paid up, the shareholder will generally not be responsible for the company’s debts. 

However, establishing a company is more expensive than operating as a sole trader or partnership although tax rates are generally lower. There are ongoing annual fees to ASIC on top of the initial set-up costs, and the tax reporting requirements for companies are greater than for sole traders and partnerships.

Tell me about… Being a sole trader

If you operate your business as a sole trader, although you may decide to have employees, you will trade, control and manage all aspects of your business as an individual. You will require an ABN and may trade using a registered business name linked to that ABN.

Sole traders retain control of all aspects of business and profit. However, if the business goes into debt, the private assets of the individual such as their home, contents and vehicles can be in danger.

As a sole trader, your income will need to be reported on your personal income tax return.

Tell me about… Operating as a partnership

A partnership arises automatically by law where two or more people work together on a business with a view to making profit.  Each state in Australia has its own statute to govern the operation of partnerships.

All losses and legal responsibilities are generally shared between the partners. Profits are shared with the other partners, as are debts. This means that creditors can access the private assets of a partner in order to settle debts of the partnership, in the same way they would be able to for sole traders.

Although a partnership does not pay tax as a separate entity, you would need to lodge an annual partnership income tax return on behalf of the business. The tax return also shows each partner’s share of net partnership income. Each partner would then pay tax on their individual share of the partnership income.

Tell me about… Setting up a trust

If you operate your business as a trust, you are a ‘trustee’ and are responsible for holding property or income for the benefit of others, who are the ‘beneficiaries’.

Structuring your business as a trust gives you control over how the profits are distributed and can also protect assets – particularly where the trustee is a company. (That’s right – because a company is its own legal person, it can be a trustee in the same way as an individual can.)

Two common varieties of trust are the discretionary trust and the unit 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. If you’re the trustee of a unit trust, each beneficiary has a fixed entitlement to a slice of the profit.

As a general comment, trading as a trust can provide tax benefits, especially when it comes time to sell.  However, the taxation of trusts is a complicated matter and you must seek the advice of your accountant on these matters.

OK – set me up!

Now that you’ve got a handle on the basics, put your business in the hands of an expert and get in touch with us. Studio Legal can put you in touch with skilled accountants to advise on the best structure for your business from a tax and accounting perspective and once this advice is obtained, can handle the establishment of your new structure.  Contact us on 03 9521 2128 or email hello@studiolegal.com.au for a complimentary proposal for our services.

DISCLAIMER

The information in this article is of a general nature. It should not be relied upon or substituted for the advice of a tax and accounting professional. It does not constitute formal legal advice, and should not be relied on as such. Please see the full disclaimer in our website terms. Please contact Studio Legal if you are seeking advice about a specific legal matter.