Choosing a business structure affects your responsibilities, liabilities and reporting obligations. Below explains the key differences between a company, sole trader, partnership, and trust.
Company
A company is a separate legal entity. It has the same rights as a natural person and can:
Incur debt
Sue and be sued
Own revenue and assets independently of its owners
Key points:
Owners (shareholders) have limited personal liability and are generally not responsible for company debts.
Companies have higher set-up and administrative costs due to extra reporting requirements.
A company must be registered with the Australian Securities and Investments Commission (ASIC).
Company officers must comply with the Corporations Act.
Sole Trader
A sole trader is the simplest business structure.
Key points:
Inexpensive to set up with minimal legal and tax formalities.
Operates using a personal Tax File Number (TFN).
No requirement to pay yourself superannuation.
You may employ other people.
If trading under a name other than your own, you must register that name with ASIC.
Risks:
You are personally liable for all debts and obligations (liability is unlimited).
Income is taxed at the individual’s personal rate.
Partnership
A partnership is an association of people who run a business together or share income jointly.
Key points:
Relatively inexpensive to establish with limited reporting obligations.
Must register the business name with ASIC if not using each partner’s name.
A formal partnership agreement is common but not mandatory.
A partnership tax return must be lodged annually with the Australian Taxation Office (ATO).
Each partner pays tax on their share of net income.
Risks:
Partners share management and control.
Partners are personally liable for all debts (liability is unlimited).
Must register for GST if turnover is $75,000 or more.
Trust
A trust is an obligation on a trustee to hold property or assets for the benefit of others (beneficiaries).
Key points:
Requires a formal deed and ongoing annual administration, making it more costly to set up and operate.
The trustee is legally responsible for operations and profit distribution.
A trustee can be a company, which may offer some asset protection.
A trust itself does not need to be registered with ASIC. However:
If the trustee is a company, it must be ASIC-registered.
If the trust trades under a name other than its own, the name must be registered with ASIC.
Risks:
Trusts can be difficult to change or dissolve once created.
Further Reading
For more details, visit: ASIC — Your business structure
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