Being knowledgeable about the different types of business structures in Australia can help both businesses that are about to launch, as well as those already established but considering to legally change their current structure. The following FAQs can help inform businesses about these matters.
What are the main types of business structures in Australia, and what do they entail?
There are four main types of structures: sole trader, partnership, company and trust.
The first applies to individuals trading on their own. An example would be a baker who makes the cakes alone and sells them to clients. The second relates to a group of individuals or entities which run a business together, however not as registered as a company. This is because a company is legally registered as an entity separate from its shareholders. Finally, a trust is set up as an entity to hold property or income for the benefit of others, as determined by the person or persons who establish the trust.
What are some tax concerns when selecting a structure?
Each structure comes with different tax implications. Capital gains tax and income tax may apply differently based on the structure, so consulting with expert commercial lawyers early can help equip a business with the correct information and advice for choosing a structure best suited to its needs.
There are also registration processes for certain taxes under Australian law. Some are compulsory, such as the Tax File Number (TFN). Sole traders can keep an individual TFN, whereas the other three structure types need to register a separate TFN for the business.
When might a business need to change its structure?
A business in its early stages may decide to set up a structure as a sole trader or a partnership, however with growth and profit there may come a point when it is better to restructure and register as a legal company. Other times, it may be wise to restructure into a trust format to better preserve assets for future generations.