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Which business structure are you?

Business hand touching organization chartWhether or not you are just starting a new business or have been in business for a while, it is important to understand the business structure under which your business operates. In general there are four structures: company, sole trader, partnership and trusts. Each structure has its own set of “rules” which greatly affect how you should operate your business. To better understand the differences between each structure, I have created the following table which highlights the most important aspects of these structures.

 

 SOLE TRADERCOMPANYPARTNERSHIPTRUST
DescriptionBusiness owned & operated by one individual.An incorporated company is a distinct legal entity, regulated by the Australian Securities & Investments Commission (ASIC).An association of people who carry on a business as partners or receive income jointly.An obligation imposed on a person known as the "trustee" to hold property or assets (such as business assets) for the benefit of others. The "others" are called beneficiaries.
Expensive to set up & maintainNOYES, because there are additional reporting requirements and as such, set up costs and on-going fees are quite costly.NOYES, because a formal deed is required & annual administrative tasks must be completed by the trustee.
Owned & controlled byThe business ownerOwned by shareholders and controlled by directors.Shared between each partner.The trustee is legally responsible for the trust's operations.
Personal assets are protectedNOYes, however, in some cases directors can become legally liable for the debts of the company.NO. Each partner is responsible for the debts of the partnership.The trustee of a trust can be a company which can provide some asset protection.
Requires its own Tax File Number & Australian Business NumberThe sole trader's own individual TFN applies to the business. The sole trader should apply for an ABN for the entity.YESYESYES
Who owns the income?The business ownerThe companyThe partnersDepends on type and set up of trust.
Is a tax return lodged for this structure?NO. Business income belongs to the owner and is reported on the owner's individual tax return.YESYESYES
Eligible for the tax-free thresholdYESNONO, however, each partner may be eligible via his/her individual tax return.NO
Wages and drawingsDrawings taken by sole traders are not classified as wages and as such, are not tax deductible.Wages paid via a company are tax deductible. Directors are usually employees of the company and as such, are paid wages.Drawings taken by partners are not classified as wages and as such, are not tax deductible.Depends on type and set up of trust.

 

Please note, this information is very general in nature. We advise that you speak with your accounting professional about your business structure and any other aspects of your individual financial situation before making important decisions.