So you’re starting or have already started a business? Congratulations! The business structure is the most important consideration in starting a business. Defining your business structure from the start allows you to create an organisational hierarchy that works, understand your legal and tax obligations, and manage them effectively.
This blog post will give you a tax perspective into business structures in Australia, thus helping you decide on the best way to go.
Understanding Different Business Structures in Australia
Many business structures exist around the world. However, in Australia, we have four mainly-used structures.
- Sole Trader: As the name implies, a sole trader business structure is one where an individual owns and manages the business. All profit, debt and liability are your legal responsibility as a sole trader.
- Partnership: In this structure, two or more people have a formal or informal arrangement of sharing the business’s responsibilities. Unlike sole trader businesses, partnerships share loss among partners, acting as a buffer in difficult financial situations. However, profit is also shared.
- Company: This is a more complex business structure where the business is a separate legal entity from its owners (shareholders). Income and assets belong to the business; however, dividends can be used to share profit among shareholders.
- Trust: This is a business arrangement where a person/entity (trustee) is charged with holding assets on behalf of another person.
Tax Obligations for Each Business Structure
Just as the management/legal structures of each business structure we defined differ, so do their tax obligations.
Tax on income for sole traders is based on the owner’s individual tax rate. Key points to note regarding your tax obligations as a sole trader are:
- A sole trader uses their individual tax file number (TFN) to lodge tax returns.
- They are entitled to an Australian Business Number (ABN) as a sole trader.
- Sole traders must meet employer and super obligations for their employees.
- Have to register for goods and services tax (GST) if their income is $75,000 and above if they want to claim fuel tax credits or provide ride-hailing services.
- May log the business activity statement if they are registered for GST.
- Can use pay-as-you-go (PAYG) instalments to prepay income tax.
Like sole traders, partnerships must have an ABN and use it for all business activities. The GST requirements are also the same.
Other key points to note are:
- Has a tax file number (TFN) specific to the business.
- Must log an annual partnership return. This details the business’s income and deductions and the distribution of income and losses across partners.
- Partners are individually liable for tax due to their income from the business. As such, each partner must report their share of the net partnership income or loss.
A company’s tax obligations are similar to those of a partnership. Like a partnership, it must apply for its own TFN, is entitled to an ABN, and follow the GST requirements as described earlier (in sole trader’s tax obligations).
Other key tax obligation points for a company are:
- A company is responsible for its tax and superannuation obligations.
- Must log annual company tax returns.
- Can pay its income tax in instalments.
- Is obligated to pay a super guarantee for eligible employees.
- Issues distribution statements to shareholders to whom it pays dividends.
A trust has the same tax obligations as a partnership. The only difference is that these obligations are to the trust and fulfilled by it.
Choosing the Right Business Structure: Tax Considerations
After reading this, you are better informed to choose a business structure. One factor to remember is your income/assets, and then select a business structure that maximises those after taxation.
For example, suppose your individual tax rate is low, and your business is small. In that case, using the sole trader business structure is preferable. However, as your business grows, it will be safer to forge a partnership to reduce the tax weight on your finances.
In all, you should seek professional advice as you decide what business structure to continue with. Even better, you can outsource your bookkeeping and save time as you focus on other essential aspects of your business.