Choosing a business structure
When you start a business, you need to choose a business structure. The business structure you choose will determine:
- who owns and operates the business
- your tax and registration requirements
- your legal liabilities and obligations.
There are 4 main ways businesses are set up in Australia:
Each business structure has different tax responsibilities.
If you're unsure which business structure to choose, talk to your registered tax agent, or trusted business or legal adviser.
You can change your business structure later, but there may be costs, tax implications and other obligations you need to meet.
Information about other business structures, including Indigenous corporationsExternal Link, is available on business.gov.auExternal Link.
Sole trader
A sole trader is the simplest and cheapest business structure to set up. As a sole trader you are the owner and operator of your business and are legally responsible for your business. This includes any debts or losses the business incurs.
A sole trader business is set up under your own tax file number (TFN). All business income is reported in your individual tax return.
As a sole trader you can hire employees, but you can’t employ yourself. If you hire employees, you will need to pay their tax and superannuation (super). You don't have to pay super guarantee for yourself but you can choose to make personal super contributions to save for your retirement.
You will be able to claim a deduction for salary, wages, and allowances you pay your employees, as they are a business expense. You can't claim a deduction for money or assets you take from the business that you use for a private or personal reason.
You will need to make sure you understand and meet the key tax obligations of a sole trader.
Partnership
A partnership is where 2 or more (up to 20) entities run a business together and share income or losses from the business. A written agreement between partners is useful for setting up how:
- the business is managed, including the responsibilities of partners
- income and losses are shared between partners.
If there is no written agreement, income and losses are equally distributed between partners.
A partnership has its own TFN, and business income is reported using a partnership tax return.
Partners are not employees of the business, and they will need to pay their own super. However, the partnership is required to pay super for its employees.
You will need to make sure you understand and meet the key tax obligations of a partnership.
Company
A company is a separate legal entity which is owned by shareholders and operated by directors. A company's income and assets belong to it, not its shareholders. There may be tax consequences if you are using your company's money and assets for private purposes.
Companies have their own TFN and will pay tax according to the company tax rate. Business income is reported through an annual company tax return.
Members of a company have limited liability, which means they are generally not considered personally responsible for a company's debts or liabilities. However, company directors can be liable for their actions and, in some cases, certain tax and superannuation debts of the company under the director penalties rules.
You will need to make sure you understand and meet the key tax obligations of a company.
If you plan to run your business through a company, you need to:
- register your company
- get an Australian company number (ACN).
You do this with the Australian Securities & Investment Commission (ASIC) when you start your company. You need to get your ACN before you can get your ABN and tax registrations.
For more information, see Register a companyExternal Link on the ASIC website.
Aboriginal and Torres Strait Islander corporations are regulated by the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (CATSI Act). The Office of the Registrar of Indigenous Corporations (ORIC) regulates companies registered under the CATSI Act. They can provide advice and support on setting up your company. Find out more at Office of the Registrar of Indigenous CorporationsExternal Link.
Trust
A trust is a structure where a trustee (which can be a person or a business) holds and manages property or assets for beneficiaries. If a trust is set up to run a business, it will normally have a trust deed that, among other things, sets out the powers of the trustees and the interests of the beneficiaries in the trust.
A trust has its own TFN, and income is reported in an annual trust tax return. The trustee lodges the trust tax return but may not be the one paying tax. Generally, beneficiaries will pay tax on the trust income that goes to them. However, the trustee is responsible for paying tax on any undistributed income.
You will need to make sure you understand and meet the key tax obligations of a trust.
It can be complicated to make changes to a trust once it is set up. See more information about trusts.
Aboriginal and Torres Strait Islander corporations
If you plan to run your business as an Aboriginal and Torres Strait Islander corporation, you need to register your corporation with the Office of the Registrar for Indigenous Corporations (ORIC). For more information, see Incorporation benefits and optionsExternal Link on the ORIC website.