m+a Accounting & Consultancy

4 Types of Business Structures — and Their Tax Implications​

When building a new business, we often focus on the product itself, the target market, the marketing strategy, and more, so we often forget one crucial element: the type of business structure.

Having a business structure that suits your needs and goals is important, especially when the tax season draws near. There are four types that you can choose from, and picking the right one can help save you from a massive headache due to liabilities, tax and paperwork.

Read on to learn more about these business structures, their importance and tax implications, and how to choose the right one for you.

What Is a Business Structure?

A business structure is the legal structure of an organisation. It is important to consider this when starting your business because it affects the tax you are liable to pay, your asset protection and ongoing costs. It also identifies how your business functions as a whole.

For businesses that are running for a while now and want to change theirs, it is still not too late. Choosing one type of structure does not mean that you are stuck with it forever because you can switch to another type as your business grows to match its needs and goals.

When choosing a business structure, ideally, you discuss it first with accounting consulting companies or business advisers to get the proper guidance with regard to important legal and tax factors. Australia has some of the best accounting companies if you are in need of corporate accounting services.

Types of Business Legal Structures

There are four types of business structures that are commonly used in Australia. These are sole trader, partnership, company and trust. Each of these has its own advantages, disadvantages and liabilities.

1. Sole Trader

A sole trader (can also be called individual entrepreneurship, sole proprietorship or proprietorship) is the most common type of business structure. This is the simplest and cheapest of the four types. In this type, there is a single person who manages the business. It is easy to maintain, requires little capital and is suitable for business owners who want to have high control over things. The owner is entitled to all profits, but also responsible for all the debts, losses and liabilities of the business.

For this type of business structure, small company accountants can help you manage your paperwork and tax filing.

This is a fit for you if you are:

  • A freelance writer
  • A retail trader
  • An independent consultant
  • A tutor
  • A caterer

For tax implications, sole traders are classified as a ‘pass-through entity’ or ‘flow-through entity’, meaning they are subject to individual income tax instead of corporate income tax. It is taxed as a part of your personal income.

For 2021-2022, here are the tax rates for Australian residents (according to the Australian Taxation Office):

IncomeTax Rate
0 – $18,2000
$18,201 – $45,00019 cents for each $1 over $18,200
$45,001 – $120,000$5,092 plus 32.5 cents for each $1 over $45,000
$120,001 – $180,000$29,467 plus 37 cents for each $1 over $120,000
$180,001 and over$51,667 plus 45 cents for each $1 over $180,000

Liabilities

  • Personal Liability

In case of debts that your business cannot pay, the owner can be directly sued by creditors. This puts your personal assets (cars, house, savings, etc.) at risk.

  • Limited Liability

Under a limited liability company or LLC, personal assets are protected and cannot be used in case of debts. The owner’s financial liability is a fixed amount, commonly limited to the amount of capital you invested.

2. Partnership

A partnership type of business structure involves two or more people managing the business. This means that the income, losses and liabilities are distributed between or among them. A written agreement is suggested to plan out the distribution of income and losses and to avoid disputes. Also, unlike companies, partnership gives greater privacy because the partners do not have to share their profits with the public.

3 Common Classifications of Partnership:

  • General partnership

This classification of partnership equally shares the management and liabilities between and among partners.

  • Limited partnership (LP)

This involves one general partner and one limited partner. The general partner handles the management of business operations, while the limited partner (silent partner) is usually just the one who provides capital for the business.

  • Limited liability partnership (LLP)

This is the most flexible out of the three classifications. Unlike the limited partnership, all partners can handle business operations. Here, all partners have limited liability in this set-up and are not responsible for the wrong actions of their other partners.

3. Company

A company business structure is managed by directors and owned by shareholders. This is a separate legal entity that possesses the same rights as a person and can be sued, keeping your personal assets protected. You are liable to pay the company any amount unpaid based on your shares.

This is a fit for those who think their business has the capacity to become highly variable and want to use losses to offset future profits. The downside is that it has high set-up and administration costs, as well as additional paperwork. This also needs an annual company tax return to be lodged with the Australian Taxation Office and requires you to complete an annual review.

Firms offering corporate accounting services can help you manage this type of business structure.

4. Trust

A trust structure involves a trustee (a person or a company) who carries on the management of the trust or business for the benefit of others (beneficiaries). The income from the trust goes to the beneficiaries.

Trust structure can be expensive to build and manage and can be difficult to change once established. It also requires a formal trust deed that states how the trust operates.

What Business Structure Should I Choose?

Before choosing a type of legal structure, you need to identify the size and type of your business, its needs and its long-term goals.

Sole trader is the right one for you if you want to handle things on your own. It gives you total control over how you want things to go. Partnership is for those who want to work with someone or with a team. Company is for big businesses with directors and shareholders. In addition, it usually keeps personal assets from being taken to satisfy the company’s debts. Trust is a fit for those who need someone to carry on a business for the benefit of others.

If you are unsure of which to pick, seek the help of accounting consulting companies to gain more insight regarding the legal and tax implications of each structure. Australia has some of the best accounting companies that are willing to help you. Depending on your needs, you can choose between corporate accounting services and small business accounting services.

How Malkoun & Associates Can Help You

If you need professional help in structuring your business or handling your business taxes wisely, Malkoun & Associates can help you. We are an Australian accounting service provider that offers business structuring, corporate accounting services, tax consulting, audit and advisory, business valuations, wealth management and more. Contact us today, and we will assist you in any way we can.