Choosing the Right Business Structure for Your Success
Starting a new business comes with many decisions, and one of the most important is choosing the right structure. The structure you select will influence your tax obligations, legal responsibilities, and overall operations. As your business grows, it’s also worth reassessing your setup to ensure it continues to work in your best interest.
Business structures vary in complexity, and while some, like companies and trusts, offer benefits such as asset protection, they may not always be the most tax-efficient option. Below is an overview of the most common business structures in Australia and how they impact taxation.
Sole Trader: A Simple, Independent Approach
Operating as a sole trader is the easiest and most common way to start a business. This structure is ideal for individuals running a small business on their own, with minimal setup and administration requirements.
Tax Implications for Sole Traders
- All business income is considered personal income and taxed at individual tax rates.
- As earnings increase, a sole trader may end up in a higher tax bracket than businesses using alternative structures such as companies or trusts.
- There is no ability to split income with others to reduce tax liability.
Partnership: Shared Ownership and Responsibility
A partnership involves two or more people or entities working together in a business. Partnerships can be formalised between spouses, business partners, or even trusts and companies. It’s recommended to have a partnership agreement in place to outline how profits, responsibilities, and decision-making are handled.
Tax Implications for Partnerships
- The partnership itself does not pay tax; instead, each partner reports their share of the business income in their individual tax return.
- Partners are taxed at their personal income tax rates.
- Unlike employees, partners cannot receive a salary from the business.
Company: A Separate Legal Identity
A company is an independent legal entity, distinct from its owners. It has shareholders who own the business and directors who oversee its operations. While a company provides limited liability protection, directors may still be held personally responsible for certain company debts.
Tax Implications for Companies
- Companies are taxed at a flat corporate rate, currently 25% for most small to medium businesses.
- From 1 July 2024, businesses earning over $135,000 in taxable income may benefit from a lower tax rate compared to individuals.
- Companies can distribute profits to shareholders as dividends, which may come with franking credits to reduce tax obligations.
- Holding passive investments (e.g., property or shares) in a company may not be tax-effective, as companies do not qualify for capital gains tax concessions.
Trust: Flexible Income Distribution
A trust is a structure where a trustee (either an individual or company) manages business assets on behalf of beneficiaries. Trusts are often used for asset protection, tax planning, and estate management.
Types of Trusts
- Fixed Trust (Unit Trust) – Beneficiaries have a predetermined share of the trust’s income and assets. Self-managed superannuation funds (SMSFs) are a type of fixed trust.
- Discretionary Trust (Family Trust) – The trustee has flexibility in distributing income and capital among beneficiaries, allowing for strategic tax planning.
Tax Implications for Trusts
- Profits are distributed to beneficiaries, who then pay tax at their personal rates.
- Trusts cannot distribute losses, meaning any losses are carried forward to offset future profits.
- A trustee or beneficiary can also work for the trust and receive a wage.
Making the Right Choice for Your Business
Your business structure influences more than just taxation—it impacts liability, succession planning, and financial flexibility. As your business evolves, reassessing your structure can help ensure it remains the best fit.
At Atium Accounting, we help business owners navigate these decisions with confidence. Whether you’re starting fresh or restructuring for growth, our team provides tailored advice to align your business with the most effective financial strategy.
Need expert guidance on structuring your business? Get in touch with us today!