Sole trader…Partnership…Unit Trust…Discretionary Trust…Company?? For business owners trying to startup and grow their business, it’s easy to become overwhelmed by the different types of legal structures and which one is most appropriate for you. Many different aspects come into play, such as asset protection and tax minimisation. Perhaps your business has only just launched, you may not be in a financial position to have an elaborate structure set up from the start. Or what if you have a well established business that’s not trading via the most appropriate structure? Are you able to change?
Good question. The quick answer is YES! It is super important to get a good structure in place right from the beginning and YES, you are able to change structures at any point in time; however, this will attract potential legal and tax consequences alongside the benefits. If you are interested to hear about the “change of structure” process, please let me know by commenting below!
For now, let’s have a brief look at two basic structures:
- Sole trader – this is an individual who runs their business themselves and is common amongst service based startups and freelancers. To become a sole trader you need to apply for an Australian Business Number (ABN) and you may also register a business name (this also applies to other structures). This structure is quick & cheap to set up and does not attract a lot of compliance; however, it does expose all of your personal assets for litigation and means you are paying tax at your individual marginal rates, which is not very tax effective.
- Partnership – we don’t see too many “partnerships” nowadays due to the fact that they expose all of your personal assets, plus each partner is legally tied to the other partners’. So, if one partner does something (or a number of things) untoward, the other partner/s are also liable for those actions. A partnership needs to be registered for a Tax File Number (TFN) and an ABN and will need to lodge a tax return each financial year. Like a sole trader, partnerships are not required by law to prepare financial statements each year; however, it is wise to do so. A partnership agreement is also an important legal document which is drafted upon the ‘coming together’ of the respective parties. The agreement details the relationship between the parties, their business and legal obligations as well as their percentage ownership.
So there you have it. A quick run down of Sole Traders and Partnerships. Make sure you check out our follow up post on Trusts and Companies, because when used correctly, they are the types of structures that will dramatically increase your asset protection and optimise your tax minimisation!
Have questions about these business structures? Comment below and our team will point you in the right direction.