Which business structure is right for you?

Four key business structures we will look at:

• Sole trader: Being a sole trader means you can be your own boss and have total control over your business.
• Partnerships: Partnerships require collaboration to make the business work.
• Trust: Trust business structures are harder to set up, but they give your assets more security.
• Company: Company or PTY LTD structures allow you to access corporate tax rates and limit your personal liability.

One of the most important decisions you’ll make when starting a business is your business structure.

A business structure defines how your business is organised and how it operates. There are several types of business structures and each of them has specific legal requirements, such as business name and trademark registrations and tax requirements.

That’s why choosing the right business structure is so important. Getting it right from the start can save you time and money down the track.¹

We’re going to look at four common business structures in Australia, to help you find the right one for you. If you’re not sure about the best approach, talk to a professional (like your accountant or lawyer) for advice.

Sole trader business structure

Sole traders are legally responsible for making key business decisions and for any financial losses that may occur ². This business structure is simple to set up and operate as you’re the only person running the business.

As a sole trader, any money your business makes is considered your personal income, and you’ll need to pay tax on it, which can be done through your regular income tax return. It’s a good idea to set up a separate bank account for tax and transfer 30% of your income into it each month.

If your business has a particularly good year, the amount of tax you’ll have to pay (your tax liability) will increase. So, it’s worth familiarising yourself with income tax brackets and the tax deductions applicable to your business. If the income from your business exceeds the threshold, you’ll also need to register for goods and services tax (GST), at which point you’ll be required to lodge a Business Activity Statement (BAS).

When it comes to superannuation, you can decide whether you want to pay yourself super or not. As a sole trader, you can choose how much super you’d like to pay and how often. But remember, it’s never too early to start saving for retirement.

Key steps to becoming a sole trader

• Apply for a Tax File Number (TFN) and an Australian Business Number (ABN).
• Register for licences and permits that you may need.
• Consider taking out business insurance.

A sole trader structure is good for:

• Freelancers and contractors, including creative professionals or tradespeople.
• Personal services, such as beauticians or personal trainers.
• eCommerce stores and side hustles.

Partnership business structure

A partnership business structure allows you to share any income and losses between you and at least one other person.³

A partnership structure is simple to set up and, like the sole trader structure, comes with minimal reporting requirements. There are three common partnership types:

1. A general partnership (GP): All partners are responsible for managing the business. Each partner has unlimited liability for any debts that may occur.
2. A limited partnership (LP): Some of the partners play an investor role, rather than a management role. Their liability (debt or money owed to the business) is based on how much they have contributed to the business.
3. An incorporated limited partnership (ILP): Some partners will have limited liability for the debts of the business, but at least one partner must have unlimited liability.

Key steps to setting up a partnership business structure

• Decide if you want to partner with other people (like family, friends, or businesspeople) or entities (like other businesses).
• Implement a partnership agreement that outlines the roles everyone will play, their liabilities and how you plan to distribute profits.
• Organise individual TFNs for all the partners involved and apply for an ABN.
• Register for licences and permits that you may need.

A partnership business structure is good for:

• Professional service providers who want to share their resources, like a doctor and podiatrist partnership.
• Businesses that have complementary skills, like an electrician and plumber partnering to provide more services.
• Family members who want to run a business together.

Trust business structure

A trust business structure is when a trustee (a person or company) operates the business on behalf of the beneficiaries (anyone who’s a member of the trust and receives income from the business).

The trustee is responsible for everything in the trust, including all income and losses. Given the complexity that comes with setting up a business trust, it’s always a good idea to chat with a qualified expert to help you understand what’s involved.

A trust structure might be right for you if you need a flexible way to distribute income, protect assets such as property, or manage estate planning. That’s why it’s commonly used by family businesses. 

Keep in mind that setting up and operating a trust business structure can be expensive. On top of that, it can be difficult to make changes to the trust once it’s established. If you’re the trustee, there’s a lot of annual administrative work that you’ll need to do too.⁴

Key steps to setting up a trust business structure:

• Choose who the beneficiaries are. They can be anyone or any entity including family members, friends, or other businesses.
• Choose who the trustee will be (if it’s not you).
• A solicitor will need to create a trust deed. The deed explains how the trust will operate, including how you’ll pay beneficiaries profits from the business.
• If you’re the trustee, you must apply for an ABN and a TFN.
• Register for licences and permits that you may need.
• Ask for advice from a business advisor, solicitor or accountant if you’re uncertain about trust business structure.

A trust business structure is good for:

• Family-run businesses that want a flexible way to distribute income among family members.
• If you’re funding a business with large assets (like property or money), this structure can provide more security.

Company or PTY LTD business structure

A company or PTY LTD business structure is its own legal entity that’s separate from you. This means your business can incur debt, sue or be sued.⁵

If you’re a sole trader, and your business has been performing well financially, this structure might be the next logical step as it allows you to take advantage of corporate tax rates.

A PTY LTD structure might be right for you if you want to protect your personal assets from business debts, plan to raise capital through private investors or need a company that can continue independently even if there are changes in ownership.

Setting up and running a company or PTY LTD structure can be complex and expensive as you’ll need to pay for applicable expenses including business name registration fees, trademarks and so on. In addition, you’ll be required to complete annual reports and tax returns to maintain compliance with government legalisation.

Key steps to setting up a company or PTY LTD business structure:

• Decide who will be the director or chief executive officer (CEO) of your business. Make sure they understand the responsibilities that come with these roles.
• You must apply for an ABN and a TFN. You’ll also need to register for GST.
• If you have staff, you’ll need to set up pay as you go (PAYG) withholding to cover payroll tax. You will also be required to pay your employees their super.
• Register for licences and permits that you may need, such as registering your business name with the Australian Securities and Investments Commission (ASIC).

A company or PTY LTD business structure is good for:

• A sole trader who is ready to take the next step in their business journey.
• Businesses with a high turnover.
• Businesses with multiple owners and stakeholders.

Next steps

Once you’ve settled on the right business structure, you can start mapping out your business plan with our easy-to-use business plan template.