4 types of business structures in Australia: Which one is best for you?

The business structure refers to the legal structure of a business.  In the early stages of building a business, you need to decide how you want it to be structured.

What are the common business structures in Australia?

In Australia, there are four main types of business structures, including:

1. Sole Trader
2. Partnership
3. Trust
4. Company 

Each business type has different responsibilities for owners, costs, legal and tax obligations.

When deciding which structure is the best for your business, it helps to weigh up the pros and cons.

We cover the most common type of business structures in Australia and their advantages and disadvantages in our guide below.

Sole trader

A sole trader is the most simple, convenient, and cheap business structure.

The sole trader (or single owner) of the business controls and manages the business on their own and is entirely legally responsible.

Being the sole trader can be extremely rewarding, but it can almost come with significant pressure.

What are the advantages of being a sole trader?

• Easy and cheap to set up
• Full control
• Keep all profit
• Fewer legal obligations
• Easy to change structure later on

What are the disadvantages of being a sole trader?

• Personal liability for all finances and risks
• Increases difficulty in raising finances
• No back-up in the case of illness.

Partnership

A partnership is formed when two or more people operate a business and share the income.

This structure is useful to share skills and assets to improve the business.

Partnerships also distribute the responsibility and risk for the owners.

What are the advantages of being a partnership?

• Additional partners means greater skill set and capital
• Less personal responsibility
• Easier to raise finance

What are the disadvantages of being a partnership?

• Shared control and decision making
• Partnership agreement usually necessary
• More costly to set up and manage

Trust

A Trust is a business structure that manages funds and assets and can invest on behalf of beneficiaries.

This type of structure is commonly used to protect, manage and pass on assets down in families.

What are the advantages of being a trust?

• Flexibility in how income is distributed
• Minimised tax if distributed to beneficiaries with lowest tax rates
• Reduced personal liability is possible.

What are the disadvantages of being a trust?

• More costly and complex to establish and maintain
• Cannot distribute any losses, only profits
• Established trusts have a maximum legal term (80 years in New South Wales)

Company

When a business owner/owners legally register the company, this reduces individual liability for the owners.

This means if the company incurs debts or is sued it does not solely fall on the directors or shareholders.

This business structure is more costly and complicated to set up but is highly beneficial for tax-purposes once the business starts turning over a certain amount.

This structure is also ideal for a business that wants to be able to easily introduce additional owners, investors, and shareholders.

What are the advantages of being a company?

• Unlimited business lifespan
• Ownership can be easily transferred
• Easier to raise finance
• Company tax rates are lower so financially effective
• when the business earns over a certain amount
• More flexible business expansion

What are the disadvantages of being a company?

• Cannot distribute any losses, only profits
• Less control as directors and shareholders must agree on business decisions.
• Higher set-up and ongoing costs

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