Video transcript - Starting your business - Choosing your business structure
When starting a business it’s very important to choose the business structure that best suits your needs.
The four business structures commonly used by small businesses in Australia are: sole trader, partnership, trust and company.
The structure you choose may affect things like the tax you are liable to pay, any asset protection, ongoing business costs, and dealing with your clients. For example, some prefer to deal only with companies.
Whichever structure you choose, make sure you understand the responsibilities that go with that structure. Typically, costs and complexity increase as you move from a sole trader to a partnership to a company or a trust. If you’re not sure which structure to choose, you should talk to an expert, such as an accountant, a tax adviser, or a solicitor.
A sole trader is the simplest business structure. The structure is inexpensive to set up because there are few legal and tax formalities. Jason operates his landscaping business as a sole trader, he trades on his own and controls and manages the business.
The business income is treated as Jason’s individual income and he is solely responsible for any tax the business must pay. This means that, after claiming a deduction for all allowable expenses, he includes all his business income with any other income and reports it on his individual tax return.
Jason must be registered for GST (goods and services tax) if his business turnover exceeds the GST registration threshold.
For tax purposes, a partnership is an association of people who carry on a business as partners or receive income jointly. A partnership is relatively inexpensive to set up and operate.
Greg and Fiona operate their website business as a partnership. It needs its own tax file number when lodging its annual Partnership tax return.
Greg and Fiona applied for an ABN (Australian business number) for the partnership and use it for all the partnership's business dealings.
A partnership is not a separate legal entity and doesn't pay income tax on the income it earns. Instead, Greg and Fiona pay tax on their share of the net partnership income they each receive.
While the partnership doesn't pay tax, it does have to lodge an annual partnership tax return to show all income the partnership earned and deductions it claimed for expenses it incurred in carrying on the partnership business. The tax return also shows each partner's share of the net partnership income.
A company is a complex business structure, with set-up and administrative costs that are usually higher than for other business structures.
Mary runs her business as a company and the money the business earns belongs to the company. The company must have a separate bank account.
Companies have to lodge an annual company tax return, which shows the company's income, deductions and income tax it is liable to pay.
Companies also usually pay PAYG instalments, which are credited against the total annual income tax it is liable to pay.
For more information about business structures and responsibilities visit ato.gov.au/gettingstarted
This video explains the business structures available to you and how tax may apply to the different structures.