Choosing the Right Business Structure

Business set up – what do you need?

This might be one of the most critical business decisions you make – so getting it right is important.

Whether you’re a first-time entrepreneur or a seasoned business owner, selecting the right structure for your business can be challenging. There are multiple options, all with different pros and cons. Far too many business owners just skip this important decision altogether, effectively merging their personal and business interests and leaving themselves at risk. If you’re serious about going into business, then you need to get serious about properly structuring it.

Here are the 4 most important criteria to consider:

  1. Your personal liability exposure from your business products or services
  2. Whether you have (or plan to have) partners or investors in the business
  3. The administrative costs of setting up and maintaining your business structure
  4. The tax effectiveness of the structure

The right legal and accountancy advice is essential in setting up the most appropriate structure for your business.

In Australia, there are generally 4 options for structuring your business.

Sole Trader: This is the simplest and least expensive option. Designed for business owners who are the sole proprietors of their companies, this structure doesn’t give you much protection if things go wrong. Your personal assets are unprotected from any claims arising from your business.

Pty Ltd Company: Incorporation effectively makes your business a separate legal entity from you. This structure involves quite a bit of paperwork and can be expensive to maintain. But it offers your personal assets protection from liability and only your company assets are at risk in the event of any legal actions and company debts.

Partnership: Creating a Partnership allows you to go into business with multiple people and share income. Partnerships are easier and less expensive than Companies to set up. However, all partners together are personally responsible for business debts and actions against the Partnership. And each partner is individually liable for debts incurred by the other partners. This means you have unlimited liability, unlike a Company structure.

Trust: A Trust isn’t an organisation at all, but instead a legal structure to hold assets. For example, you might set up a Trust to hold your business assets, then appoint a Trustee to manage them. Commonly, the Trustee is a Company and the Trust provides asset protection and limits liability from operating the business. Trusts are very flexible for tax purposes. However, a Trust is a complex legal structure and establishing a Trust costs significantly more than a Sole Trader or Partnership.

Once you’ve decided on the best structure for your business and chosen a business name, you need to Register your business and business name. And you need to do this with several different Australian regulators and organisations.

Fun fact about Registrations …

Irrespective of whether you’ve chosen to be a Sole Trader, Partnership, Trust or Pty Ltd Company, you will need a:

  • Registered business name
  • ABN (Australian Business Number)
  • TFN (Tax File Number)

and will probably need to register for GST too. So there really are no differences between the various Australian business setup options here.

First you need to sign up for an ASIC Connect account. Next, you need to take your ACN and apply for an ABN (Australian Business Number). An ABN has become a very important unique identifier of your business (necessary for opening bank accounts, filing tax returns, including on invoices, etc.) and every Australian business needs one. At the same time you can register on this Australian Government website for your TFN (Tax File Number), PAYG (Pay As You Go) and GST. There are no registration fees for these registrations.

IP Australia: This step is often skipped by start-up businesses, but is vital for protecting your business, brand name and intellectual property. Although you have registered your business name with ASIC, this does not mean that you have exclusive ownership of it. It can be used as a “trading as” name, “Pty Ltd” name or trademarked as a brand name. To prevent this, you need to register your business name (and logo and tagline) with IP Australia.

Website Domain & Social Media: You also need to register your business online and these days that doesn’t just mean a website address. It includes all the major social media platforms too! You can register your “.com.au” and all derivative domains with a service like Netregistry.