Did you know that when you start a business in Australia you must choose a business structure?
In Australia there are four main ways businesses are set up – sole trader, partnership, company, and trust – and each one has different tax responsibilities.
Sole Trader
This is the simplest and cheapest business structure. Operating under this structure means you are the only owner, and you control and manage the business. You are therefore legally responsible for all business aspects. For example, debts and losses are not distributed, you can employ others but not yourself and you are responsible for paying super. Some of the key features include:
- Using your individual tax file number when lodging your return.
- Income is reported in your individual return.
- Must apply for and use ABN in all business dealings.
- Register for GST (income > $75,000).
- Pay income tax rates at an individual level.
Company
A company is a legal entity with higher set up and administration costs. A company is run by its directors and owned by its shareholders. While a company can provide some asset protections, its directors can be legally liable for their actions and in some cases the debt of the company. Companies are regulated by ASIC. Some of the key features include:
- Must file for a tax file number to use when lodging annual tax return.
- Entitled to an Australian business number (ABN) if it is registered under the Corporations Act 2001. A company not registered under the Corporations law may register for an ABN if it is carrying on an enterprise in Australia.
- Register for GST (income > $75,000).
- Owns the money the business earns – the individuals who control the business cannot take money out of the business, except as a formal distribution of the profit or wages.
- Pays tax at a company tax rate.
- Must pay super guarantee contributions (SGC) for any eligible workers.
Partnership
A partnership is a group or association of people who carry on a business and distribute income or losses between themselves. A partnership is inexpensive to set up and operate. The partners share income, losses, and control of the business. The partners are not employees, but the partnership might also employ other workers. Partners are responsible for their own superannuation arrangements. Some key features include:
- Income, losses, and control is shared among the partners.
- Each partnership has its own TFN and must lodge an annual partnership return.
- The partnership does not pay income tax on the profit it earns – each partner reports income in their individual return.
- Each partner pays tax on their share of the partnership profit at the individual tax rate.
- Register for GST (income > $75,000).
Trust
Setting up a trust can be expensive as a formal deed is required outlining how the trust will operate and there are formal yearly administrative tasks for the trustee. A trustee is legally responsible for the operation of the trust. The trustee can be an individual or a company. Profits from the trust go to beneficiaries. Some key features include:
- Must have its own tax file number (TFN) for lodging its annual tax return.
- Must apply for an ABN and use it for all business dealings.
- Register for GST (income > $75,000).
- may be liable to pay tax depending on the wording of its deed and whether any income the trust earns is distributed to its beneficiaries.
- May be able to access small business tax concessions.
- Must pay super for any of its employees (this may include the trustee if they are also employed by the trust).
Tax Agents can help you choose the structure that is best suited to your needs and goals. If you are looking for advice setting up your company or simply wanting some more information Accounting Edge is happy to help, just give us a call!
