Skip to content

Guide to Small Business – Structuring and Tax

Deciding to start your own business can be one of the most exhilarating decisions you will make in your lifetime. The foremost important step is making a decision relating to the type of structure you set up – from which you will run your business.

There are typically four types of structures that you can use to run your entity. They are:

  1. The Sole Trader
  2. The Partnership
  3. The Company
  4. The Trust

The sole trader

This is the simplest of all the structures. It basically involves obtaining an ABN under your name or a business name of your choice. In essence, running your business as a sole trader means that you are required to disclose all of the revenue you make from your enterprise, and can claim all of the tax deductions relating to generating that income personally.

As a Sole Trader, you will be legally responsible for the entire decision making process. You can still employ people to help you run your business. You will generally be required to complete the business schedule of the individual income tax return – where you will disclose all of the income and expenses of the company. Your profits will be taxed at the individual marginal tax rates.

The Partnership

The partnership is a business structure that involves a number of people running an enterprise jointly. All of the partners are jointly and severally liable for the decisions made in running the partnership. All partners are entitled to their share of the partnership incom, and can claim their share of the partnership expenses.

The partners must keep track of their contributions to the partnership, and their withdrawals via separate entity accounts. Any profits/losses must be distributed based on the partners ownership per the partnership agreement, and then the partners are required to disclose their share of partnership income/expenses in their personal tax returns. Any tax applicable will be paid by the partners personally at their marginal tax rates.

The Company

A company is an entity that exists separately from its owners. By law, a company is treated as a person in its own right. It can take on debts, sue and be sued. The rights and duties of a company are entirely separate from the rights and duties of the directors and shareholders. This adds a layer of protection to the company directors in the event of a legal dispute, provided that the directors have not given personal guarantees.

The company owners are the shareholders, and their ownership is represented by shares which give them the right to vote at member meetings.

From a tax perspective, the company is required to submit its own tax returns and pay tax at the company tax rates. For small business entities, the tax rate is currently set at 28.5%, and for all other entities it is a flat 30%. The income and expenses of the company is entirely separate from the income and expenses of the owners.

The Trust

A trust is a separate legal structure that you can set up to pass the control and management of your business to someone else. There are many types of trusts that you can run in Australia. Typically, businesses are run through a discretionary trading trust. These are often called “family trusts” because they are usually associated with tax planning strategies and asset protection measures for the family members.

In a discretionary trust, a trustee is appointed to manage the day to day running of the trust, and beneficiaries are entitled to the income of the trust. The trustees are bound to follow a set of rules that are contained in the trusts deed, and the income of the Trust is distributed to the beneficiaries that are nominated in the deed. The amount of profit distributed to the beneficiaries is decided by the trustee, and disclosed in the trust’s tax return. The beneficiary is thein required to disclose the income in their personal tax returns, and pay tax at their own marginal tax rates.

Choosing the right structure is the most important decision that you will make, as it will affect the way that you run your business, as well as your tax obligations. You should ensure that you discuss your options with a tax agent prior to going ahead with your structure.

Scroll To Top