The type of structure you opt to run your business will influence how the business operates, including how you manage your profits and tax. A vast majority of businesses are run as a Sole Trader, Partnership, Company or Trust. Here's a short summary of each to help you make the right choice for you.
If your business is a one-person operation (i.e. you) then it may suit you to operate as a Sole Trader. It's simple and cheap to set up – you don't even need to register a business name if you don't want to (just use your own name) – and, because you have no partners, all your profits belong to you. On the flipside, you are 100% liable for any losses and your profits are treated as personal income, which means you pay tax on them through your tax file number.
A Partnership structure enables two or more people to jointly own a business and its assets, with all parties 100% liable for any debts regardless of who may have incurred them. You must register for an ABN, tax file number and GST (if you turn over more than $70,000 a year). Profits from the business are split with your partners and you must pay income tax on your share. To help resolve disagreements and agree a future route for partners wishing to exit the business, it is advisable to have an official partnership agreement drawn up by a lawyer.
Operating as a Company means that your business becomes a legal entity in its own right. This generally reduces your liability for business debts, while giving you increased flexibility to distribute profits to other shareholders. Set-up costs are higher than for other options and there is more paperwork involved (a company must file papers with ASIC and register a business name, ACN and ABN). It must also file an annual company tax return. A Company is easier to sell or pass on than a Partnership.
Setting up a Trust enables the trustee to hold property or income for the benefit of others. Typically, a Trust will be set up as a Company – this helps reduce its liability to debts and maximise asset protection. Businesses operating in this way most commonly use a 'discretionary' Trust, which gives the trustee greater flexibility when distributing income and profits to beneficiaries. Though relatively complicated to establish, set up and ongoing compliance costs are similar to those of a Company.
Watch how companies such as The Margaret Chocolate Company made their business dream a reality.