Australia has a rather simple business structure. Unlike the rather complex 11-type business structures of UAE, Australia only has four main types of companies that can be formed.
In this article, we will talk about all four of these business structures, how they operate and what are tax systems surrounding them.
So let’s get right into it!
What Is A Business Structure?
A business structure is like the blueprint for how a company is organized and operates. It’s how a business is legally set up and managed. Imagine it as the foundation of a house – it determines the rules and roles for everyone involved.
There are different types, like sole proprietorships, partnerships, corporations, and LLCs. For Australia specifically, the four types of company formations are mentioned below in the next section.
For example, let’s say you and a friend start a bakery together. You can choose a partnership as your business structure. In this setup, both of you share the responsibilities and profits. It’s like a team effort.
On the other hand, if you decide to open a tech company and want to raise money from investors, a corporation might be better. In a corporation, you can issue shares to investors and have a board of directors to make decisions.
The choice of business structure can impact taxes, liability, and how you can grow your business, so it’s an important decision for any entrepreneur.
What Are The Four Business Structures In Australia?
The 4 Business Structures In Australia
In Australia, there are four main ways you can structure your business, and each has its own pros and cons. You can run your business as a sole trader, partner up with someone in a partnership, go with a trust, or establish a company.
Choosing the right business structure is a big deal when you’re starting out because it affects how you’ll deal with taxes and what kind of paperwork you’ll have to do as your business grows.
To make this decision, think about stuff like how many people are in your business, what exactly your business will do, how much money you’ll make, and how big you want your business to become.
We’d recommend you go through our starting a small business guide in Australia, to know more about how you can choose the right business structures for your endeavor.
Now let’s explore them each one by one.
1. Sole Trader
This is the most basic way to run a business.
A sole trader is someone who runs the whole show by themselves. Even if you hire others to help, you’re the one in charge, and you’re legally responsible for everything the business does. In the eyes of the law, your business and you are like a package deal – you both use the same tax and business numbers.
Plus, any money the business makes or debts it racks up are all on your shoulders; you can’t split that responsibility with anyone else except yourself.
We have discussed extensively the sole trader business models and how they compare to a company in Australia in our sole trader vs company blog.
How Does The Sole Trader Tax Work In Australia?
If you’re running your own business as a sole trader in 2024, the amount of tax you owe will be based on how much money you make. This means the profit you earn from your business after subtracting allowable deductions.
As a sole trader, you’re required to pay taxes at your individual tax rates. These rates can vary, but for the 2023-24 financial year, they look like this:
- If your income is up to $18,200, you won’t have to pay any tax (this is known as the tax-free threshold).
- If your income falls between $18,201 and $45,000, you’ll pay 19 cents for every extra dollar over $18,200.
- If you earn between $45,001 and $120,000, you’ll pay $5,092 plus 32.5 cents for each extra dollar over $45,000.
- For incomes ranging from $120,001 to $180,000, you’ll owe $29,467 plus 37 cents for every additional dollar over $120,000.
- If your income exceeds $180,000, you’ll pay $51,667 plus 45 cents for every extra dollar over $180,000.
Keep in mind that tax laws and rates can change over time, so it’s crucial to stay updated with any revisions.
Additionally, as a sole trader, you might have other taxes to consider. For instance, if your business’s annual turnover reaches $75,000 or more, you’ll need to pay a 10% goods and services tax (GST). There’s also the Medicare Levy, which amounts to 2% of your taxable income.
Do go through our sole trader tax guide to know all the legalities and technicalities of this domain.
2. Partnerships
When two or more people team up to run a business together, it’s called a partnership. They share the business earnings. Making a partnership is usually easy on the wallet.
Most partnerships are created using a partnership agreement that spells out who does what and who gets what.
Here’s the catch: the partnership itself doesn’t get taxed; instead, each partner pays tax on the money they make from the partnership. But there’s a downside too.
Partners share not just profits but also the legal responsibility for the business’s debts and obligations. This means if the business can’t pay its bills, the partners are on the hook. Plus, disagreements among partners can be a problem and harm trust in the partnership.
How does partnership tax work?
In a partnership, you and your business buddy don’t have to pay income tax as a team, but you have to file a special tax form for the partnership every year. This form tells the government how much money the partnership made and who gets how much.
When the partnership earns money or loses money, each partner includes their part in their own tax report. Even if you don’t actually get the money, you still have to tell the tax folks about it.
On the other hand, the partnership also has to fill out its own tax form to share info about how much money it made, what it spent, and who got what.
When it comes to things like selling stuff and making a profit, each partner is responsible for figuring out their own share of the gain or loss for tax purposes.
3. Trust
In a trust, there’s someone called a trustee who looks after the property or stuff in the trust and runs the business on behalf of the folks who benefit from it.
This trustee can be a person or a company.
But how do you create a trust? Compared to other business structures, a trust is usually not for profit.
To create a trust, you need a formal Deed, and the trustee has to do yearly tasks. This can make it quite expensive and complex.
Now, the good part about trusts is that they’re flexible when it comes to how money is shared among the beneficiaries, and you can send money to people with lower incomes to save on taxes. Plus, if you set up the Deed right, it can protect your assets.
But, the downside is that trusts can cost a lot to create, and there are extra rules and legal stuff to follow.
What taxes do trusts pay?
When it comes to trusts, the way taxes work depends on who benefits from it. If you’re an adult or a company that benefits from a trust, you’ll pay taxes on the income you get from the trust based on your regular tax rate.
Now, for non-residents and minors, things are a bit different. The person in charge of the trust, called the trustee, pays the taxes on their behalf. But, these beneficiaries might still need to report that income on their own tax returns. They can also get a tax credit for the tax paid by the trustee.
If the trust gives money to minors, there might be higher tax rates. This applies to folks under 18 years old.
Sometimes, there might be some money in the trust that no one can access right now. In that case, the trustee pays taxes on that portion of the income. If the trust doesn’t have any income, the trustee pays taxes on any net income.
Usually, the trustee is taxed at the highest individual tax rate, except for some special trusts like deceased estates, which have different tax rates.
4. Company
A company is like its own legal character, able to own stuff under its own name.
When you see “Pty Ltd” after a business name, it means that the business is a registered legal thing doing business on its own. Shareholders own a company, and directors are the ones steering the ship day-to-day. Any profits a company makes go to the shareholders as dividends.
The cool thing is, if the company goes into debt, the shareholders usually don’t have to pay from their pockets. The company’s debt is limited to what the company owns.
Companies have to follow the Corporations Law, which means directors have to put the company’s interests first. But, starting a company and keeping up with all the legal stuff can be expensive. And you also have to share important info with the public.
It would be better if you go through our guide comparing companies and sole traders so that you get a good idea of how a company can act similarly to an individual entity while still being differentiated legally from a sole trader.
What taxes do companies have to pay?
Although we’ve discussed extensively the business taxes in Australia, we’ll briefly mention all the ‘need-to-know’ about it. As this is a very vast topic, we recommend you go through that guide if you’d like to know in depth about this.
There are three taxes that companies in Australia have to pay: Company or Income Tax, Capital Gains Tax (CGT), and Goods and Services Tax (GST). Other than that, there are some minor taxes as well like fringe benefits tax and payroll taxes.
All the taxes that we’ve mentioned above are dynamic and the tax rate depends on the company size and turnover. It is only GST that is fixed at 10% and has always been since its inception in the year 2000.
Conclusion
Every business is unique, and no two business owners have identical situations. It’s a good idea to have a chat with an accountant or lawyer to discuss the expenses and potential drawbacks of different business structures. This way, you can ensure that you’re picking the perfect business setup that suits your specific business and its future requirements.
Whatever your business structures may be, handling your finances properly is a must. ProfitBooks allows just that, by providing powerful bookkeeping and financial records on the cloud. So your business travels with you! Get your 100% FREE account now!
Also Read:
Starting A Small Business In Australia
What Taxes Do Small Businesses Pay In Australia?
ATO Tax Deductions: 14 Things You Didn’t Know About
