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How to Choose From The Different Business Structures In Australia

Are you planning to start a small business in Australia? If yes, you must first know the different business structures set by the ATO or Australian Taxation Office. These four types are – Sole Trader, Partnership, Company, and Trust. Details of these structures will help you to understand the key differences.

Sole Trader

As the name suggests, a sole trader refers to a specific structure run by an individual. It is the cheapest form of business structure. Here, you will be the only owner to have complete control over the business management. And for the same reason, you will be legally responsible for various aspects of the business like losses and debts. 

If you recruit workers in your business, you have to pay their super. And, you have to pay your super, too. You can deposit the payment in a specific fund to save for your future.

Key Features of Sole Trader

Key features of a sole trader business are as follows.

  • You can use your individual tax file number at the time of income tax return lodgment.
  • In your individual tax return, you can include all your income. You can use the business items section to show all the business income and expenses as there is no separate tax return for business for sole trader business.
  • If the annual GST turnover is $75000 or more, you can register your business for GST.
  • Tax is payable at the income tax rates same as individual taxpayers.
  • You can claim a deduction for any contributions related to personal super. This contribution has to be made after notifying the super fund.

Partnership

In a partnership business, an association or a group of people own a business, and the business income and losses are distributed among themselves. If you and one of your family members or friends decide to run a business together, you can call it a partnership business. It is cheaper to set up a partnership business and operate. Here, business control is also shared among the partners.

It will be better to have a written document of partnership agreement outlining the distribution pattern of income and losses. This can be of great help as it prevents any chance of misunderstandings and disputes. It also helps when it comes to the lodging of tax. Partners can employ workers and are responsible for paying the super for not only themselves but also employees.

Key Features of Partnership

Following are the basic features of a partnership business.

  • Partnership business has its Taxation File Number, and partnership returns must be lodged annually showing all deductions and income.
  • Income tax is not payable on the earned profit. A share of the partnership income is included in the tax returns of each partner. And, this tax on the partnership profit share is paid by the partners at the individual tax rate.
  • Unlike sole traders, the partners need to apply to get a specific Australian Business Number (ABN) and use it for all business functions.
  • Here also, the business should be registered for GST if the turnover is $75000 or more.

Company

Of the business structures in Australia, A company is a legal entity with higher administration costs and setup. The owners of a company are known as stakeholders, and the control remains in the hands of the directors. A company offers some asset protection, and for any actions or debts, the directors stand responsible.

Key features of a Company

A company structure has the following key features.

  • Like a partnership, the company owners must apply for a TFN, which should be used when lodging the annual tax return.
  • A company should also have an ABN if it has registered with the Corporations Act 2001. If it is not registered, it may also need to register if it operates as an enterprise in Australia.
  • An annual company tax return should be lodged regularly. And the income tax needs to be paid at the company tax rate by instalments using the PAYG or pay as you go instalments system.
  • The money owed by a company is the profit earned in the business.
  • The company should be registered for GST if the annual turnover is $75000 or more.
  • The company should pay the super guarantee contributions for only the eligible workers.

Trust

In a trust structure, a trustee (maybe a company or an individual) runs the business. It is the trustee that decides how the income will be distributed among the beneficiaries. That is why setting up this business structure is relatively more expensive.

Key features of a Trust

The primary characteristics of trust are as follows.

  • Like a partnership and a company, a trust should also have its TFN, which will be used at the time of tax return.
  • A company should have its own ABN.
  • Like all the three business structures, a trust should also be registered for GST if the annual GST turnover is $75000 or more.
  • Payable tax will depend on its deed and whether the earned income is distributed among the beneficiaries. If the payment is distributed among the adult beneficiaries, the trust does not need to pay the tax.
  • It should pay super for all beneficiaries.

Personal Services Income (PSI)

PSI is different for different business structures in Australia. For both sole trader and partnership, owners can receive the personal services income or PSI if the business accepts the payment for the owner’s efforts and skills. But if the same thing happens for a company or a trust structure, the owner needs to check whether the relevant rules apply. 

What Factors Do You Have To Consider While Choosing The Structure?

First of all, you have to consider the specific needs of your business. The other factors that you need to consider are:

  • Licenses that you need.
  • Payable tax amount.
  • Your position, i.e., whether you are an employee or a business owner.
  • The extent of your control over your business.
  • The amount of paperwork and running costs.

Conclusion

If you need professional help when setting up your business, you can seek the assistance of an experienced professional. Palladium Financial Group can emerge as the best resource in such cases and can help you to choose from the different business structures in Australia according to your needs.

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