Reviewing your business structure

Estimated reading time: 8 minutes

The business structure you choose can affect how you run your business, including your financial responsibilities and your tax and super obligations.

While you may have already chosen a structure when you registered for an Australian Business Number (ABN), it’s important to review it regularly to see if it’s still meeting your business‘s needs as your business grows and changes.

We can help you understand:

Sole trader

A sole trader is a person trading as themselves, and is the simplest business structure to set up.

As a sole trader, you’ll generally make all the decisions about your business, although you can employ people to help you run your business. You’re legally responsible for all of the business income and debts.

Some advantages and disadvantages of a sole trader structure include:

Advantages
  • Sole control over the management and direction of your business.
  • Sole ownership of all your business's profits and assets.
  • Less paperwork to do than in other business structures.
  • Lodge an individual tax return – including a supplementary business and professional items schedule – instead of separate returns for your business as well as your individual return.
  • You can use your individual Tax File Number (TFN) for your business.
  • A relatively easy process to sell or close your business.
  • You might become eligible for the small business tax offset.

Disadvantages

  • You have sole liability for your business debts, so you may risk losing your personal assets (home, vehicles, etc.) if you cannot repay your debts.
  • Your intellectual property may be at risk if the business fails.
  • You may pay tax at a higher rate than a company, as you pay tax based on your personal income tax rate.
  • Limited opportunities to expand your business as all profit and debts are tied to your personal income and assets.
  • You need to make your own superannuation arrangements.

As a sole trader, you can use Pay as you go (PAYG) instalments to help you make regular payments towards your income tax so you don’t end up having to pay a big bill at the end of the financial year. You can also make voluntary pre-payments at any time.

You can choose to make voluntary super contributions to build up your savings for your retirement. You may be able to claim a deduction for your contributions in your income tax return.

Did you know?

As a sole trader, you don't have to register for a business name if you use your own personal name as your business name.

It’s important to remember that registering your business name does not give you ownership or legal protection of that name. To legally protect your business name, you will need to trade mark it.

Find out more:

Partnership

A partnership involves a number of people owning a business together. You may choose to use a partnership structure for your business if you'll be jointly running the business with another person or a number of people (up to 20). There are two types of partnerships - general and limited. The laws governing partnerships differ depending on your state or territory.

Do you need a partnership agreement?

You don’t need a written partnership agreement to have a partnership, but it is a good idea. A partnership agreement should outline how income or losses will be shared and distributed among the members of the partnership, and how the business will be controlled.

A partnership agreement can help prevent misunderstandings and disputes about what each partner brings to the partnership, and what they are entitled to receive from the income of the business.

Some advantages and disadvantages of a partnership structure include:

Advantages

  • Easier and less expensive to set up than companies.
  • Unlike operating as a sole trader, you can combine the resources and expertise of a number of people to run your business.
  • Profits and losses are shared between partners according to their share (as specified in the 'partnership agreement').
  • Changing the legal structure is relatively simple (i.e. changing from a partnership into a company at a later stage).

Disadvantages

  • Everyone in the partnership is individually liable for debts of the partnerships. This is known as being 'jointly and severally' liable (i.e. unlimited liability).
  • Partners cannot transfer their ownership to someone outside the partnership unless the other partner(s) agree.
  • Personal differences between partners may interfere with the business relationship.
  • Each partner may need to make their own superannuation arrangements.

Did you know?

A partnership:

  • has its own TFN and must lodge an annual partnership tax return showing all income and deductions of the business and how profits and losses are distributed amongst the partners
  • doesn't pay income tax on the profit it earns – each partner reports their share of the partnership income in their own tax return
  • must have an ABN and be registered for GST if its annual GST turnover is $75,000 or more.

Dissolving a partnership

There are a number of ways a business partnership can be dissolved. These include:

  • the partnership term as stated in the formal partnership agreement has expired
  • there is a death of one of the partners
  • the business has become bankrupt or insolvent.

Read more about Dissolving partnerships and companies.

Find out more:

Companies

A company, unlike a sole trader or partnership, is a complex business structure where the business is a separate legal entity to the owners. This means the company has the same rights as if it was a person, and can incur debt, sue and be sued. However, the company’s owners (the shareholders) can limit their personal liability and are generally not liable for company debts.

In Australia, the most common types of company are:

  • 'proprietary limited' companies – commonly referred to as ‘private’ companies
  • 'public' companies – companies that are available to the general public to own a share in through public share trading.

A private, ‘proprietary limited’ company can be established by as few as one or two people, each being a shareholder, and dividing directorships and management of the company between them. Sometimes these positions are all fulfilled by just one person.

Proprietary limited companies can’t raise funds through offering shares in the company to the public, so they need to raise money either through their shareholder’s direct investment, or by debt financing.

Some advantages and disadvantages of setting up a company include:

Advantages

  • You’re generally not liable for the company's debts, and will only risk the paid up value of the shares you put into the company (i.e. limited liability).
  • Legal arrangements can be made in the company's name, rather than the name(s) of its directors and managers – this can have benefits for your personal privacy.
  • Company shares are transferrable, as are management roles, so the company can continue even if key people leave the company.
  • The tax rate for companies is different from your personal tax rate, and depending on your personal tax rate, may be lower.

Disadvantages

  • Setting up and running a company can be more complex and costly than other business structures.
  • Directors may be held personally liable for the company's debts if they fail to meet their legal obligations.
  • Profits that are distributed to shareholders as dividends are taxable – however, a franking credit may be allocated to offset the tax payable.
  • Lessors, suppliers and lenders may be reluctant to lend money or enter into contracts or leases with proprietary limited companies unless directors or shareholders provide personal guarantees.

Did you know?

  • You need to register a company with ASIC.
  • Company officers and directors must comply with certain legal obligations under the Corporations Act 2001.
  • A company:
    • must apply for its own TFN and use it to lodge its annual company tax return
    • must be registered for GST if its annual GST turnover is $75,000 or more
    • pays tax at the company tax rate and may be eligible for small business concessional rates
    • is entitled to an ABN if it is registered under the Corporations Act 2001. Companies that are not registered under the Corporations law may still register for an ABN if they are carrying on an enterprise in Australia.

Closing a company

There are four ways to close a business that operates as a company:

  • voluntary deregistration
  • winding up a solvent company
  • ASIC-initiated deregistration
  • insolvency.

No matter which method is used, the final step in the process is always deregistration of the company.

Did you know?

Even if your company has stopped trading, you must still meet the legal obligations of a company, including:

  • lodging and paying any outstanding tax and super obligations
  • paying the annual review fee to ASIC. Read Closing your company from the ASIC website for more information.

Find out more:

Trusts

A trust allows a third party (known as a trustee) to look after assets on behalf of beneficiaries. A business set up as a trust means the trustee will carry on the business for the benefit of the beneficiaries. A trustee is legally responsible for operating the trust and can be an individual or a company.

Although a trust is not a legally separate entity, like a company, trusts are treated as taxpayer entities for the purposes of tax. The trustee is responsible for managing the trust's tax affairs, including registering the trust in the tax system, lodging trust tax returns and paying any tax liabilities.

Beneficiaries (except some minors and non-residents) need to include their share of the trust's net income as income in their own tax returns. There are special rules for some types of trust including family trusts, deceased estates and super funds.

Some advantages and disadvantages of setting up a trust include:

Advantages

  • You can use a company as the trustee of a trust, providing some asset protection.
  • You can use this structure if the profits from the trust need to go to beneficiaries rather than those running the trust.
  • A trust can still access small business tax concessions.

Disadvantages

  • Trusts can be expensive to set-up and operate.
  • You need to create a formal trust deed that outlines how the trust operates.
  • The trustee needs to undertake formal administrative tasks every year.
  • The trustee is legally responsible for the trust’s operations.
  • Beneficiaries of a trust need to pay tax on their share of the trust's income regardless of when or whether the income is actually paid to them.

Did you know?

  • A trustee can be a company registered with ASIC.
  • If a trust does business under a name other than its own, the name must be registered as a business name with ASIC.

Find out more:

Other types of businesses

Aside from business structure, there are also different business arrangements your business can be in, such as:

Joint Ventures

A joint venture is two or more people or entities joining to do business together for a particular purpose, usually a single project, rather than as an ongoing business.

Before you start a joint venture it's important to negotiate with your partners:

  • what the output of the joint venture will be (the goal of the project)
  • how you will share the output
  • management arrangements
  • liability of the project.

To minimise risk before entering into a joint venture agreement, it’s recommended that you seek professional advice.

Some advantages and disadvantages of a being in a joint venture include:

Advantages

  • Additional resources and investment for your project.
  • Specific or technical resources and expertise that you may not have originally had for your project.
  • You may access new markets and networks through your joint venture partner/s.
  • You can share the risk with your joint venture partner/s.
  • Only requiring a temporary commitment, often only for the length of the project.

Disadvantages

  • Sharing the output of the project with your partner/s.
  • The risk of working with joint venture partner/s that may have work cultures and management styles that are different to your own.
  • You and your joint venture partner/s may have conflicting objectives for undertaking the project.
  • Each partner may have different levels of commitment and priority for the project.

Did you know?

It’s important to realise the differences between a joint venture and a partnership – this usually centres on the output of the project. Joint venture partners usually become entitled to a share of the products of a project (i.e. units built or mining products), whereas partners in a partnership become entitled to a share of the project’s profits.

Find out more:

Franchises

Franchising allows one business to operate under the trading name of another business's already established brand and sell its products and/or services for a specified period.

Buying into a franchise can be a good alternative if you don’t want to start a business from scratch. Or, if you already have a business, a well-managed franchising agreement can be an effective way to move into new markets and grow your business.

What is a franchise agreement?

A franchise agreement sets out the agreement between a franchisor and the franchisee.

In a franchise agreement:

  • the franchisor grants the franchisee the right to operate a business under their franchise. The franchise can include a specific system of working, a brand, a set of products/services, marketing plan for the business and more as determined by the franchisor
  • the franchisor gives the franchisee’s business the right to use particular trademarks, advertising or other commercial symbols owned, used, or licensed by the franchisor
  • the franchisee pays, or agrees to pay, the franchisor to be part of the franchise.

Advantages and disadvantages of buying a franchise

Some advantages and disadvantages of buying a franchise include:

Advantages

  • You get to use an established brand, reputation and image for your business.
  • You can implement proven management and work practices from the beginning.
  • Access to national advertising and ongoing support from the franchise.
  • You have the independence of owning a small business with the benefits of being in a big business network.
  • Some franchisors will offer training so you can operate their business model.
  • It may be easier to secure finance for a franchise.

Disadvantages

  • You need to enter into a formal agreement with your franchisor, and follow the agreement, which may leave little room for creativity when running your business.
  • You may be restricted on where you can operate, the products you sell, and the suppliers you use.
  • Your business and reputation may be affected negatively by the performance of other businesses in your franchise.
  • Sharing your profit with the franchisor.
  • No guarantee that your agreement will be renewed at the end of the franchise term.

Did you know?

Franchisors and franchisees must comply with the Franchising Code of Conduct.

Winding up a franchise

Franchise agreements don't always last their full term - they can get cut short for a number of reasons, including:

  • selling a franchise
  • franchisor insolvency
  • franchisee insolvency.

For more information check out Ending a franchise agreement on the Australian Competition and Consumer Commission (ACCC) website.

Find out more:

Changing your business structure

As your business grows and changes, it’s important to keep considering if your business structure is still the best structure for your business.

In most cases if you do decide to change your business structure, you will need to cancel your ABN and apply for a new one.

You need to cancel your ABN if you are changing from:

  • an individual/sole trader to a partnership
  • an individual/sole trader to a company
  • a partnership to a company.

Before changing your business structure, it’s also important to understand the impact this will have on your business and clients. Changing business structure can include changes to your tax obligations and other business registrations.

If you are unsure, seek professional advice before cancelling your ABN.

Find out more

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