business structures

Business Structure: Choosing Between a Sole Trader, Partnership & Company Entity Structure

Information verified correct on December 11th, 2016

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.

Speak to an accountant today about what business structure is best for your situation

What are the types of business structures?

Sole proprietorship

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.

Partnership firm

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.

Limited company

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.

Trust

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.

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14 Responses to Business Structure: Choosing Between a Sole Trader, Partnership & Company Entity Structure

  1. Default Gravatar
    Geoff | September 4, 2016

    Hi, My wife and I want to set up a dog grooming business, though she will be the only one technically ‘working’ (I have a job). We were wondering if it safer to go with a partnership or not for the security of the business. Also, is there an option that can avoid having to be hit so hard by the tax man? (money is tight right now)
    thanks

    • Staff
      Shirley | September 6, 2016

      “Thanks for your questions.

      It goes beyond the scope of our service so you will need to consult a tax professional in regards to your enquiry.

      A tax professional will be able to assist you in determining the right structure for your business to ensure that you manage your tax liabilities but also protect your assets.

  2. Default Gravatar
    james | March 7, 2016

    i am a sole trader with a current builder lic. and I building house by my self. one day I bought a block of land to build a house in both my name and my wife name. Does I have to form a partnership structure?

    • Staff
      Shirley | March 8, 2016

      Hi James,

      Thanks for your question.

      Please note that we can only provide general advice that doesn’t take into account your personal situation. It’s best to speak to an accountant or a legal professional to discuss the best business structure for you.

      Should you decide to form a partnership structure, your wife will be sharing the business assets with you – you may want to consider adding her name to the title instead if it’s just related to property rights.

      Hope this helps.

  3. Default Gravatar
    Phillip | February 12, 2015

    What are the major differences between a sole trader business and a partnership business?

    • Staff
      Shirley | February 12, 2015

      Hi Philip,

      Thanks for your question.

      There is not much of a difference. A sole trader gives the one owner all the decision making power. A partnership is formed when two or more people go into business together. Partnerships can be general or limited.

      Cheers,
      Shirley

  4. Default Gravatar
    RE | August 25, 2014

    Good evening,
    A friend of mine told me that as a sole trader if I happen to die, my kids will inherit the business which might put my partner (de facto) in a difficult financial situation. He advises me to set the business as a partnership so my partner will inherit the business (as long as a testimony says so).
    Is that the way it works ?
    Thanks for your answer.

    RE

    • Staff
      Elizabeth | August 26, 2014

      Hi RE,

      Thanks for your question.

      When the sole trader of a business dies, the business (and assets and liabilities of the business) become a part of that sole trader’s estate. Those in control of the estate then decide the fate of the business. So, you can set up your business as a partnership, but keep in mind you and your partner will have shared financial responsibility for all business decisions made. You also have the option of making your partner in control of your estate so they can inherit the business upon your death.

      For more detailed information on this it may be best to seek the advice of a lawyer or tax agent to help you determine the best course of action for your situation.

      Hope this has helped.

      Thanks,

      Elizabeth

  5. Default Gravatar
    | March 4, 2014

    Hi,

    Which is good between Proprietorship business and Trust from Tax benefits perspective? Ta.

    DJ

    • Staff
      Marc | March 5, 2014

      Hi DJ,
      thanks for the question.

      This is a question best suited to a trusted accountant. They’ll be able to tell you what kinds of tax benefits you may be eligible for in respect to different business structures.

      Cheers,
      Marc.

  6. Default Gravatar
    Nicodemous | November 23, 2013

    Do you think most businesses are sole proprietorship

    • Staff
      Marc | November 25, 2013

      Hello Nicodemous,
      thanks for the question.

      According to the Australian Bureau of Statistics in their ‘Counts of Australian Businesses, including Entries and Exits’ report from May 2013, sole proprietors make up the second largest group of businesses behind companies.

      I hope this helps,
      Marc.

  7. Default Gravatar
    christine | July 7, 2013

    I currently have a business entity and trust for my small business. The business is no longer making any significant profits and the wages I am paying for my staff under the company entity are crippling me. I want to change to a sole trader. How do I do this?

    • Staff
      Shirley | July 8, 2013

      Hi Christine,

      Thanks for your comment.

      I’ve emailed you about your query.

      Cheers,
      Shirley

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