The structure you start with is difficult and expensive to change later, because changing it usually means transferring assets, which can trigger capital gains tax and transfer duty. It is worth an hour of advice before you register anything.
Sole trader
Cheapest to set up and to run. You need an ABN and, if turnover reaches the registration threshold, GST registration. Business income is your income and is taxed at your marginal rate.
The catch: you and the business are the same legal person. A business debt is your personal debt, and a claim against the business reaches your house and your savings. Insurance helps; it does not create a legal separation.
Suits: low-risk service businesses, sole operators testing an idea, contractors with strong professional indemnity cover.
Partnership
Two or more people carrying on business together. Cheap to establish and flexible, but each partner is generally liable for the debts of the whole partnership — including debts incurred by the other partner without your knowledge.
The catch: most partnership disputes we see involve no written partnership agreement at all. Without one, the default statutory rules decide what happens when a partner wants out, dies, or stops contributing.
Company
A separate legal entity registered with ASIC. It contracts in its own name, and shareholders' liability is generally limited to the amount unpaid on their shares. Company profits are taxed at the company rate, and distributions to shareholders carry franking credits.
The obligations: annual review fees, maintaining registers, and directors' duties that are enforceable personally. Directors need a director identification number, and can be personally liable for unpaid PAYG withholding and superannuation, and for trading while insolvent. Limited liability is real, but it is not unconditional — a bank asking for a personal guarantee removes much of the protection.
Suits: businesses with employees, physical premises, real liability exposure, or plans to bring in investors or sell.
Trust
A trustee — often a company set up for the purpose — holds assets for beneficiaries. A discretionary (family) trust lets the trustee decide how income is distributed each year among the beneficiaries.
The advantages: flexibility in distributing income, a degree of asset protection, and a structure that makes succession within a family straightforward.
The costs: higher establishment and accounting fees, a deed that must actually be followed, and rules that penalise undistributed income. Trusts are also less well understood by banks, which can complicate borrowing.
The questions that decide it
- What is the real risk? Do you have employees, customers on your premises, or a product that could injure someone?
- Who else is involved? A structure with two or more people needs documented rules for exit, deadlock and death.
- What do you expect in five years? A buyer of a business usually wants to buy shares or assets — the structure determines which is possible and what tax follows.
- What can you sustain? A structure nobody administers properly gives no protection. An unsigned deed and unfiled resolutions defeat the purpose.
Whatever you choose, do these three things
- Put the agreement in writing — a shareholders' agreement, partnership agreement or trust deed that says what happens when someone wants out
- Keep the money separate — a business account used for private spending undermines the structure in a dispute and in an audit
- Review the structure when the business changes materially, not five years later
General information only. This article describes the law in general terms and is not legal advice for your situation. Time limits are strict and the law changes. Call BNE Lawyers on 0423 007 888 to discuss your own circumstances in English or Vietnamese.