The early days of business are difficult, and the questions are endless. Where should I rent an office? Which business structure should I choose? How will I pay my bills? Where can I find startup capital? Should I hire employees? If you’re struggling with the sheer enormity and number of decisions you’re facing these days, please don’t stress. Every business owner goes through this process, and “decision fatigue” is a real problem for most people.
First, let’s consider one of the bigger, more pressing questions at the moment: Which business structure should I choose? There are technically seven different types of business structures in Australia. Some of these are more popular than others, and you probably have random advice about which one is best.
Your friends may say, “Pick a trust. My sister’s brother’s wife has a trust, and she says it’s the way to go.” You may feel drawn towards the simplest option, which is a sole trader. Perhaps you’re most interested in saving money on taxes, and you’re wondering which business structure offers the most tax benefits. In most cases, business owners are primarily concerned with protecting their assets and making sure they’re compliant.
Feeling overwhelmed yet? That’s okay. We’re here to help and walk you through the process.
Types of Business Structures in Australia
First, let’s look at all the different types of business structures in Australia. These are basic overviews, but you can find a more detailed definition in our Business Structure eBook.
This is the simplest, most straightforward business structure. If you’re working alone (without a partner or other entity), you’re a sole trader. It’s easy to keep records as a sole trader, but you may pay higher taxes, and your assets aren’t protected.
You can also incorporate your business as a company, which is considered an individual entity. That means the company is responsible for taxes, financial reporting, and liability. This structure is the most complex as far as setup and expenses are concerned, but the advantages may be worth it.
If you run the business with another person (or multiple people), you can form a partnership. This entity works a lot like a sole trader, but expenses and income are split between partners. All partners are responsible for taxes and liabilities. A partnership is fairly inexpensive and simple to set up.
A trust is similar to a company, but your business isn’t incorporated or a separate entity. Instead, the trust accumulates income from the business, which is then passed on to the trust’s benefactors. The trustees may be either individuals or corporations. Taxes and other liabilities also fall to the benefactors. This is one of the best structures for low tax rates, but it’s a more complicated and expensive setup process.
How to Choose a Business Structure
When you’re choosing a business structure, you can ask yourself these questions to find the best option. Better yet, you can partner with nexZen to gain better clarity and direction.
What are the roles of each owner or partner? How will you handle profit and income?
These two questions generally go hand in hand. Usually, the person who contributes the most to the business also receives the most profit or income. If you’re working with another person to start your business, you’ll need to discuss each owner’s role, tasks, responsibilities, and financial contributions. You’ll also need to decide how to handle expenses and revenue in the future.
How will you handle distributions? Will you have shareholders?
Distributions are payments made to owners or shareholders of a company. The business structure you choose determines how you’re allowed to make these distributions.
Who should pay taxes? How will income flow through the business? How important is your effective tax rate?
Your business structure also determines how income flows through your business, who pays taxes on the income, and which tax rate applies. For example, sole traders receive all of the income from the business and pay their effective personal tax rate on the income. In certain situations, you may also allocate franking credits to shareholders to avoid double taxation. This only applies to companies with shareholders, however.
Do you need limited liability or asset protection?
Only certain business structures limit the owner’s personal liability. If you choose a structure that doesn’t limit liability, you will probably need another form of protection for your personal assets.
How should owners exit the business?
At some point, one or more owners may choose to end their role with the business. One person may wish to “buy out” all the other owners, an owner may wish to start another business, etc. The business structure you choose now will affect this decision. Some structures are easier to leave than others.
Choosing a business structure is arguably the biggest decision you will make for your business. The ideal choice differs from one business to the next, so it’s important to ask yourself thoughtful questions and commit some time to the decision-making process. Taxes, personal liability, income flow, and exiting the business all seem like future problems, but they will eventually become a reality. You can avoid future stress, hassle, and expense by making the best decision now. Of course, most business owners could use a little help in this area. Business structure likely isn’t your area of expertise. However, it is our area of expertise. If you’re feeling overwhelmed or discouraged or simply need a little guidance, nexZen is here. We can walk you through the process and help find the perfect business structure. We’ll assist with the paperwork too. Connect with nexZen to find answers to all of your business structure questions and more.