There are various options available to business owners as far as business structures go.
Each type of business structure has its pros and cons and thus it is necessary to choose the right type of structure for your business. Not just in terms of ease of set up and registration formalities, but there can be different tax implications depending on the type of business structure you choose. This article lists some of the main types of business structures that are used in Australia.
What are the types of business structures?
Owing a business as a sole proprietor is perhaps the easiest way to start a business. As the name suggests, a sole proprietorship is one that has a single business owner. The business owner can choose to conduct business under their personal name or assign a separate name to their business. However, assigning a different name to the business does not mean that you are creating a separate entity. A sole proprietorship can never be separate from its owner.
All the assets as well as liabilities of the business are that of the owners as well. Hence, if your business incurs any losses, then you will be personally liable to pay those losses even if it means paying them off from your personal funds. Setting up such a business structure is very easy and generally requires the owner to register the business with the appropriate authorities. Once you have registered the name and procured any local licenses that you need for the business, your sole proprietorship is ready to go.
If two or more people are planning to go into business together, then they can use the business structure of a partnership firm. While it is not mandatory to do so, every partnership should have a written partnership deed that lists all the important terms and conditions of the partnership. The profit and loss sharing ratio of all the partners should be specified clearly in the partnership deed. If nothing has been specified in this regard, then it is automatically assumed that all the partners have an equal share in the profits and losses of their firm.
All the partners in a partnership are responsible for each others’ actions. If there are any outstanding liabilities of the firm, then all the partners are usually collectively as well as individually responsible for the firm’s liabilities. Any income that arises from a partnership firm is taxed in the hands of the partners. Hence, the individual partners need to account for their share of the income in their personal income tax returns. A partnership firm dissolves automatically if one or more of the partners leave the firm or upon the death of a partner.
This type of business structure is becoming quite popular especially among larger groups of people who want to start a business together. A company is a separate legal entity from its owners and the procedure to set up a company is quite complex. There are many laws that govern the running of a company, which can be quite complicated to understand. Also, companies have to maintain many different types of books and records and have to report their activities to the relevant authorities.
However, one of the biggest advantages of a limited company is that the liabilities of a company do not pass to the owners. Hence, if a company makes business losses and has outstanding debt, then the personal property of the company owners cannot be used to pay off the debts of the company, unless and until a particular owner has provided a personal guarantee to that effect. All the owners of a company are given a certain share in the company. The amount of control they can exercise on the running of the company often depends on the number of shares held by each owner. The income of the business is taxed in the hands of the company and not the individual owners.
A trust is a type of business structure that can be used by many types of businesses. A trust is a separate legal entity from the owners of the trust. All the assets and property of a business that is held under a Trust are the property of the Trust and not the individual owners. However, the Trust holds all such assets on behalf of the owners of the trust who are also known as the beneficiaries of the trust. Any income that arises from a trust business passes to the beneficiaries of the trust according to the terms laid out in the trust deed.
A trust is usually managed by a trustee, who may or may not be one of the beneficiaries of the trust. If a trustee is not one of the beneficiaries, then they are simply responsible for managing the trust and do not own any of the trust’s property and cannot claim any of the trust’s income. The liabilities of a trust cannot be passed to the owners or beneficiaries and have to be settled by the trust itself.