The right structure is important.

One of the very first issues you should consider when contemplating a new business, whether by starting a new one or purchasing an existing one, is business structure.

At Avenue Solutions, we can provide comprehensive advice about business structuring options and can establish most types of business structure.

The type of structure you choose for your new business will impact upon how your business is perceived by others, how the profits of your business will be taxed, your legal relationship with third parties (e.g. customers and suppliers) and the level of risk to which you are exposed through your business. Getting structure right is important.

Which business structure is right for you?

The table below describes the 4 main types of basic business structure, together with some key advantages and disadvantages of each.

Structure TypeBasic Structure DescriptionKey AdvantagesKey Disadvantages
Sole TraderSole trader is arguably the easiest way to carry on business, both in terms of establishment and ongoing management. To be a sole trader you need, at a minimum, an Australian Business Number (ABN). If you want to trade using a name other than your own, you also need to register a business name. You can do this through ASIC.

Any profits generated through business activities is typically assessable income of the sole trader, and will be added to any other income for the purposes of determining taxable income, on which the sole trader is liable to pay tax. For that reason, if the sole trader has other income not related to the business, a sole trader may not be the best structure.

Sole trader numbers continue to decline, with business owners tending to choose other structures.
Easy and quick to set up, with minimal establishment costs. Also easy to close. Because there is no separation between the business activities and the business owner, the business owner is personally liable for debts and other liabilities of the business. This isn't always ideal.

Generally speaking, once income exceeds $80k per annum, the sole trader structure might not be tax effective, compared to other structures.
PartnershipA partnership is the relationship which exists between two or more persons carrying on a business in common with a view to a profit. It is, essentially, two or more sole traders working together.

Partnerships are now the least most common of the main business structures, and have been for some time. They continue to decrease in popularity.
Quite easy to set up, although a partnership agreement is often required (and certainly recommended) which can add to expense. Relatively easy to close down. Partnership profits are distributed amongst partners who pay tax on those profits at their own marginal tax rates. Personal liability attaches to partners in a partnership much as it does for a sole trader. Each partner is generally liable for the acts of other partners, and that can sometimes be a problem. The addition and retirement of partners can cause disruption to the partnership structure, as it technically brings one partnership to an end and creates a new one.
Company Unlike partnerships and sole traders, a company is a legal entity separate from its shareholders/owners. The most common type of company is a proprietary company limited by shares.

If you operate business through a company, that means that you will not personally own the business. Rather, the business will be owned by the company, which is effectively a fake legal person with all the same rights and obligations (and more) as a natural person. The shares in the company are owned by the people who might otherwise be the sole trader or partners in a partnership.

The company structure is now the most common business structure in Australia.
Because of the separation between the business activities and the owners, the company structure offers good asset protection.

It also offers a flat rate of taxation for small companies of 28.5, which might compare favourably with tax rates of individuals (including sole traders and partners) which can currently be as high as 49% once income exceeds $180k per annum.

Adding and removing shareholders is quite easy, and doing so will not effect the identity of the company which continues to exist regardless of who its shareholders are at any particular time.
Companies are generally more expensive to establish and operate. Most people require help to properly operate a company, from advisers like lawyers and accountants. So this can add to expense.

Companies are more regulated that sole traders and partnerships, which might also add to expense and provide more room for error if appropriate advice is not sought and followed.

Closing a company is generally far more involved than closing a sole trader or partnership business, and can be expensive and time consuming.

We do not generally recommend a company structure if it is being used to start or buy a small business which will be sold within 2-5 year period.
TrustA trust is a legal relationship which exists between a trustee and beneficiaries. The legal relationship typically comes about, and is regulated by, a trust deed, which a lawyer usually drafts.

Trusts are becoming increasingly common, and are now the second most popular of the main business structures.
Due to their legal nature, trusts are capable of offering very good levels of asset protection. They can also be very tax effective if managed correctly.

Discretionary or family trusts are very effective at distributing profits and wealth amongst family members.
Trust are complex, and are not well understood by many. This can create problems when dealing with third parties such as banks, suppliers and investors.

Like companies, trusts can be expensive to establish relative to other structures. To achieve maximum asset protection, a company is often used as part of the trust structure which adds to establishment costs. A trust is generally the most expensive of the main business structures to establish.

If not managed properly, any benefit typically associated with using a trust can be lost and indeed there can be serious disadvantages. Accordingly, professional advice and assistance is almost always required.

Can you change structure?

Yes, it is possible to change structure. Doing so, however, may be more or less technically difficult (depending on your circumstances) and could expose you (and/or the relevant business entity) to taxation, mostly in the form of capital gains tax. In its most recent budget, the federal government flagged changes to tax laws which, if passed, would seek to prevent capital gains tax associated with the restructure of a small business. If introduced, the changes would likely come into effect from 1 July 2016.

At Avenue Solutions, we are generally cautious about encouraging people to move beyond the sole trader / partnership structure particularly where there has been limited business planning and the viability of the business has not been tested. Generally speaking, in many circumstances, we think it is appropriate to commence business as a sole trader whilst you effectively 'test the waters' - if the business gains traction and looks to be viable, say, after 3 months, a restructure without significant additional costs and/or taxation is generally possible.

The importance of professional advice

We strongly recommend that, before implementing a business structure, you take advice from your preferred legal or accounting adviser. Consults with an Avenue Solutions Adviser to discuss business structures start from just $99: Business structure consultations

If you have any questions about business structures generally please contact us or your preferred professional adviser.