Types of Business Structures in Australia

When starting a business in Australia, one of the most important decisions you’ll make is choosing the right business structure. The structure you choose has legal, tax, and operational implications. There are several common types of business structures, each with its own benefits and drawbacks.

Sole Trader

A sole trader is an individual who operates a business under their own name or a registered business name. Sole traders have full control of the business and are personally responsible for all debts and liabilities. This means that if the business incurs debt, the owner's personal assets, such as their home, can be used to pay off the debt.

Pros:

• Simple and inexpensive to set up.
• Complete control over business decisions.
• Fewer reporting requirements compared to other structures.

Cons:

• Unlimited liability – personal assets are at risk.
• Limited access to funding and investment.

Example:

Tom operates a landscaping business as a sole trader. He has complete control over his business but is personally responsible for any debts the business incurs. If Tom’s business runs into financial trouble, his personal assets could be used to pay off creditors.

Partnership

A partnership is an agreement between two or more people to run a business together. Partners share profits, losses, and legal responsibilities. In Australia, there are two main types of partnerships: general partnerships and limited partnerships.

General Partnership

In a general partnership, all partners are equally responsible for managing the business and are personally liable for the partnership’s debts.

Limited Partnership

In a limited partnership, one or more partners (limited partners) contribute capital but are not involved in day-to-day management. Their liability is limited to the amount they have invested.

Pros:

• Shared responsibility and resources.
• Greater access to capital.

Cons:

• Personal liability for general partners.
• Potential for conflict between partners.

Company

A company is a legal entity that is separate from its owners (shareholders). A company provides limited liability, meaning the personal assets of shareholders are generally protected from the company’s debts. Companies are required to comply with more regulations and reporting obligations than sole traders or partnerships.

Pros:

• Limited liability for shareholders.
• Easier access to funding and investment.

Cons:

• More complex and expensive to set up.
• Additional regulatory requirements, including annual reporting to ASIC.

Trust

A trust is an entity that holds property or income for the benefit of others, known as beneficiaries. Trusts are managed by a trustee (which can be an individual or a company), who has a legal duty to manage the assets of the trust in the best interests of the beneficiaries. Trusts can be useful for tax planning and asset protection.

Pros:

• Potential tax advantages.
• Flexibility in distributing income to beneficiaries.
• Asset protection.

Cons:

• More complex to set up and administer.
• Trustees have legal responsibilities and can be held personally liable for breaches of trust.

Example:

A family business may set up a discretionary trust, where the trustee has discretion over how the business income is distributed to the beneficiaries (family members). This can help with tax planning, as income can be distributed in the most tax-efficient way.

For more information on business registration, you can also check out our pages on ABNs and ACNs.