Types of Business Structures in Australia: What’s the Best Fit for Your Business?

Authors: Nikita Chikohwa & Petro Kaloterakis, Progressive Legal

If we’re talking about starting a successful business, you need a vision, a plan and a drive to succeed despite all the challenges and setbacks that lie ahead. However, it’s important to consider an another, often overlooked, fundamental decision. Choosing the right type of business structure can be a make or break for your business and sometimes you will need to change your business structure as time goes on to make sure it is fit for purpose from a legal and tax perspective as things change. Remember the saying, the only constant in business is change.

Different types of business structures all have their own advantages and disadvantages. In this guide, we’ll help you understand the most popular types of business structures. Our goal is to help you decide on one that best suits your business.

We’ll cover the advantages and disadvantages of a sole trader, partnership, company, trust, and co-operative. At the end, we’ll give you some important things to consider when determining what the best structure is for you. 

1. Sole trader

A sole trader structure is widely considered as the most straightforward and most common type of business structure but it’s also arguably the most dangerous from a legal risk perspective as you and the business are one and the same. Essentially, it’s for someone that wants to run their own business and have complete control over decision-making. 

What are the advantages of a sole trader?

Starting a sole trader business is simple and cost-effective. This is because there are minimal legal and administrative requirements involved. You don’t need to register a company or comply with more complex regulations.  

Instead, you only need to apply for an Australian Business Number (ABN) and register for Goods and Services Tax (GST) if your turnover exceeds the GST threshold. These steps can be completed quickly and at a low cost, making it accessible for most people. 

Additionally, you have total control over all business decisions and operations. This means you can operate with full autonomy, making changes and decisions without needing to consult others.  

Profits are taxed at your individual income tax rate, which can be advantageous if your income is not high. This can result in lower overall tax liability compared to other business structures where profits might be subject to corporate tax rates. 

What are the disadvantages of a sole trader?

The major downside to a sole trader is legal risk!  

You and the business are one and the same. That means that you are personally liable for all business debts, obligations and liabilities. This unlimited liability means that personal assets, such as your home or car, can be used to settle business debts. Unlimited liability is distinguishable from the limited liability available to a company (see below).  

Also, raising capital can be challenging, limiting the growth potential of your business. Investors may be reluctant to invest in a sole trader due to the lack of limited liability protection. Investors may also perceive a sole trader to be less “formal” than other types of business structures, such as companies.  

Lastly, if you are a sole trader, the business will no longer exist upon your death. In such circumstances, any succession planning is made more difficult.

2. Partnership

A partnership involves two or more people (up to 20) who carry on a business together. This structure is suitable for professionals like lawyers, accountants, and architects who want to combine their expertise. 

What are the advantages of a partnership?

The big advantage here is that workload and responsibilities are shared among partners. This distribution can lead to more efficient business operations and management. A partnership also means that partners can pool their resources and skills, which can enhance business performance.  

Another important advantage is the fact profits are distributed among partners and taxed at their individual income tax rates, allowing for potentially favourable tax outcomes. 

What are the disadvantages of a partnership?

A partnership is not a separate legal entity, as such partners are personally liable for business debts, and each partner is liable for the actions of the other partners. Problems can also start occurring when differences in opinions and conflicts arise which can ultimately affect the business.  

Even though disputes can still disrupt operations, a partnership agreement can help mitigate the risks. A partnership agreement is a formal document which covers a range of issues, including but not limited to: outlining the role of each partner, their respective contributions, dispute resolution and the procedure involved in ending a partnership.

Depending on your jurisdiction, there may also be applicable legislation governing partnerships. For example, in New South Wales, partnerships are covered by the Partnership Act 1892 No 12 (NSW).

3. Company

A company is a separate legal entity from its owners, providing limited liability protection. There are two main types of companies: private or proprietary companies (Pty Ltd) and public companies. 

What are the advantages of a company?

Companies offer several advantages over other business structures. Firstly, they provide significant risk management benefits by separating the business entity from its owners, this otherwise known as “limited liability”. Inmany cases, members  and directors will not be personally liable for the debts of a company (however, there are exceptions to this).   

Additionally, companies have easier access to capital, as banks and investors are more likely to provide funding to incorporated businesses. Incorporating can also enhance your business’s credibility, making it more attractive to clients and partners.  

Companies benefit from perpetuity, continuing to exist independently of changes in ownership or management. There are also some extra government grants and tax incentives that are only available to incorporated businesses. 

Incorporating could be a great decision for your business.

What are the disadvantages of a company?

Establishing a company involves more complex and costly procedures. Incorporation requires compliance with the Corporations Act 2001 , which includes registering with the Australian Securities and Investments Commission (ASIC), maintaining company records, and meeting annual reporting obligations.  

Companies are also subject to stringent regulatory requirements and reporting obligations, which can be time-consuming and require professional assistance. This is why it’s highly recommended to consult with an experienced corporate lawyer when looking to incorporate. 

Further, while limited liability applies to companies, members and directors can still be liable for company debts (i.e. if they have signed personal guarantees). If you are a Director, you have further obligations under the Corporations Act 2001 (Cth) (i.e. duty to avoid conflicts of interest).

4. Trust

Trust are types of business structures where a trustee holds and manages assets for the benefit of beneficiaries. Trusts are often used for family businesses or for managing investments. 

What are the advantages of a trust?

Trusts can provide protection of assets against creditors and legal claims. They offer flexibility in distributing income to beneficiaries, which can provide tax advantages. Trusts also facilitate the transfer of assets to future generations, making them useful for succession planning. If a corporate trustee is appointed as trustee of a trust, limited liability may also be possible.  

What are the disadvantages of a trust?

Setting up and managing a trust can be complex and costly. This is because trusts are subject to regulatory requirements and reporting obligations. Legal and accounting fees associated with creating and maintaining a trust can be substantial. 

If you are an appointed trustee of a trust, it is important to note that you could be personally liable for the debts of the trust.  Further, a trust is not a separate legal entity, so it cannot sue or be sued.  

5. Co-operative

A co-operative is a member-owned business structure that operates for the benefit of its members. Co-operatives are common in sectors like agriculture, retail, and housing. 

What are the advantages of a co-operative?

Members have equal say in decision-making, promoting democratic governance. Profits are distributed among members or reinvested in the co-operative. Co-operatives can also offer support and resources to their members, fostering a strong sense of community and shared purpose. 

What are the disadvantages of a co-operative?

The problem with co-operatives is that raising capital can be challenging, limiting the growth potential. Establishing and managing a co-operative can be complex and require member commitment. Ensuring all members are aligned with the co-operative’s goals can also be difficult. 

Which type of business structure is right for me?

If you’re assessing the different types of business structures and trying to decide on which one is right for you, consider the following key factors:

Legal liability

Evaluate how much personal liability you are willing to take on. Sole traders and partnerships entail personal liability, while companies offer limited liability protection. However, as mentioned above, if you are a director, you are also bound to further directors duties.  

Tax implications

Different structures have varying tax implications. Companies benefit from a flat corporate tax rate, whereas sole traders and partnerships pay tax at individual income rates. 

Control and management

Consider how much control you want over your business. Sole traders and companies offer more control to the individual owner, while partnerships and co-operatives involve shared decision-making. 

Capital raising

Think about your business’s capital needs. Companies have more avenues for raising capital through issuing shares, whereas sole traders and partnerships might find it more challenging to attract investors. 

Succession planning

If you plan to pass your business on to future generations, a trust or a company might be more suitable due to the ease of transferring ownership. 

Compliance and costs

Weigh the cost and complexity of compliance for each structure. Companies and trusts involve more regulatory requirements and higher setup costs compared to sole traders and partnerships. 

Key takeaways

Choosing the right business structure is a crucial decision that impacts your business’s legal, tax, and operational aspects. All types of business structures in Australia have their own set of advantages and disadvantages, making it important to consider your specific needs and goals.  

Whether you’re a sole trader, looking to form a partnership, considering a company, trust, or co-operative, understanding these structures will help you make an informed decision and set your business on the path to success. 

If you’re unsure about which structure is best for you, get in touch with our experienced corporate team at Progressive Legal.  

Remember, the right business structure can pave the way for your business’s growth and prosperity. This is why we provide valuable insights tailored to your situation. Call us on 1800 820 083 or make an enquiry below.

Need Corporate Law Advice?

Please get in touch with us today via phone or the contact form on this page.

1800 820 083