Choosing Your Business Structure

Here’s a summary of each entity type:

• Sole Trader: an individual trading on their own and under their own name
• Partnership: an association of people/entities running a business together under their own names
• Company: a legal entity separate from its owners and managers (named the shareholders and directors respectively)
• Trust: an entity that holds property or income for the benefit of others

This is a significant decision, as it will make a big difference to the amount of tax that you pay and your legal and financial responsibilities.

This decision is highly dependent on your personal and business’ circumstances. Please take a look at the following FAQs for the definitions of each entity type and which one would suit you best.

The four entity types commonly used by small businesses in Australia are:

• Sole Trader: an individual trading on their own
• Partnership: an association of people/entities running a business together 
• Company: a legal entity separate from its owners and managers (named the shareholders and directors respectively)
• Trust: an entity that holds property or income for the benefit of others

The Sole Trader structure is the simplest form of business structure where there is no division between business and personal assets. Most sole traders opt to trade under their own name whilst others choose to register a business name (see “Do I need to register a business name” for more info).

• This structure is the least onerous in terms of reporting requirements and gives the owner the most control of their business.
• Losses incurred in business activities may be offset to other income earned (such as wages or on investments).
• The biggest downside to this business structure is unlimited liability. This means that all of a sole trader’s personal assets are liable to be used against business debts and obligations.

A Partnership involves two or more people going into business together. Unlike a company, a partnership is not a separate legal entity. Each partner jointly owns all the business’ assets and liabilities. Partnerships are classified as either general or limited.

• A General Partnership involves each partner being equally responsible for the management of the business, and each has unlimited liability for debts and obligations.
• A Limited Partnership must have at least 1 general partner and at least 1 limited partner. General partners are responsible for the day-to-day running of the limited partnership and their debt is unlimited. Limited partners do not take part in the management of the limited partnership and has his/her liability limited to the amount contributed to the partnership.

A Company is a more complex legal entity whose existence is separate from its owners and managers (named the shareholders and directors respectively). Possessing a legal status, a company has rights similar to that of a living person meaning that it can incur debt, sue and be sued.

There are two main types of companies in Australia; proprietary (private) and public companies.

• The Proprietary structure is most commonly used by small businesses. A company does not sell its shares to the public and has limited liability. Proprietary limited companies are commonly denoted by the abbreviation ‘Pty Ltd’ suffix at the end of their company names.
• Public companies can sell their shares to the public and have their liability limited. Public companies are subject to onerous disclosure and compliance responsibilities because of their listing on the Australian Stock Exchange.

Source: ASIC website

One major advantage of a company is that its shareholders have their liability limited to the amount that they have invested. This enables the owner of the company to protect their personal assets. This means that if a shareholder has 100 shares in a company valued at $5 per share, their debt is limited to $500. 

Another advantage to incorporating a company is that profit earned is subject to the company tax rate of 30%. This would be beneficial to a sole proprietor whose income could otherwise be subject to a higher marginal tax rate.

The Sole Trader structure offers minimal asset protection as the business assets are owned personally. This is what is referred to as unlimited liability, meaning that all business debts are also owned personally by the individual.

Partnerships offer liability protection depending on whether it’s a general partnership or limited partnership. A general partnership offers no liability protection. Within limited partnerships there are two types of partners, general and limited. General partners are responsible for the day-to-day running of the limited partnership and their debt is unlimited. Limited partners do not take part in management and have their liability limited to the amount contributed to the partnership.  

Companies enjoy a greater degree of asset protection due to the fact that they possess limited liability. This means that any claims creditors have over the shareholders are limited only to the amount of shares they own in the business. Any claim that creditors have over the business cannot be extended to the shareholders’ personal assets.

No, unfortunately not. As soon as you complete the registration process Veromo commences the registration process with ASIC, ABR Register and/or ASIC Business Names Register. If you wish to change your registration please contact us at support@veromo.com.au as soon as possible.

Generally, you must become familiar with your company’s business and how it is run and take reasonable steps to comply with the legal requirement to keep proper records and meet reporting requirements.

If your company is a “Small Proprietary Company” or a “Small Company Limited by Guarantee” you will generally not have to prepare formal financial reports each year and lodge them with ASIC. However, all companies must keep written financial records that correctly record and explain the company’s transactions, financial position and performance, and allow true and fair financial statements to be prepared and audited.

Your responsibilities as a director are not limited by your particular experience and background.

(Source: ASIC)