Choosing a business structure

  1. What business structure?
  2. Business names
  3. Sole trader
  4. Partnership
  5. Company
  6. Trust

What Business Structure should I use?


The choice of a business structure is an area where you should seek professional advice from an accountant and/or a lawyer. Make sure you understand the advantages and disadvantages of each type of structure before you make the decision. We have covered some of these below, however more detailed information about the advantages and disadvantages of each structure can be found at business.gov.au.

For information about how each structure is treated for tax purposes visit the ATO.

Business Names

A Business Name is the name under which a sole proprietor, partnership or company may choose to trade. All trading names unless registered under other legislation (e.g.: Company names under the Corporations Law), must be registered as a Business Name.

How do I Register a Business Name?

To run a business in NSW you must register your business name if it is being conducted under a name other than that of the owner. Business names are registered with ASIC.

How much does it cost and how long does it last?

The current cost for a one year registration is $35.00 and for three years $82.00.  You can access further information on fees and payment methods from ASIC.

Can I trade without registering a business name? 

If a business is being run under any name other than that of the owner the name (surname and given names and/or initials) must be registered with the Department of Fair Trading. For example, if words are added to a name, it must be registered (e.g. Bill Brown & Brothers).

Can any name be used for a business?

No. There are some names you will not be allowed to register. These include names that are:

  • Already registered
  • Misleading or offensive
  • The same or substantially similar to a registered business or company name (in state of registration) and where the business is similar
  • Indicating that a business is a charity or non-profit organisation. You may not use words such as Associate, Club, League, Society or Institute unless you are constituted as one of these.

Sole trader

A sole trader is where a person trading as the individual is legally responsible for all aspects of the business. This includes any debts and losses, which can’t be shared with others. This is the simplest and relatively inexpensive business structure.

Advantages:

  • You are your own boss and are responsible for all decisions
  • All profits belong to you
  • Inexpensive business structure to establish and maintain
  • Losses from the business can be offset against any other income or future earnings

Disadvantages

  • You alone have responsibility for the business. Holidays become a luxury you may not be able to afford simply because nobody else has the expertise to run your business efficiently in your absence
  • You are personally liable for all business debts, which means your assets (including your home), may be at risk
  • You continue to pay tax at the personal rate

Partnership

What is a Partnership?

Partnership enables a group of people to contribute their time, talents and money towards the business. In return, they share the responsibilities and profits. In the absence of a formal partnership agreement the law will assume that each partner has an equal share. All partners may be personally liable if the business incurs any debts.

If you are entering into a partnership it is a good idea to draw up a partnership agreement to ensure that all partners are clear on their rights and responsibilities.

A limited partnership is a variant of an ordinary partnership; whereby the liability of a partner contributing capital can be limited to the amount of financial contribution, provided that the person doesn’t take part in the management of the business.

Advantages:

  • Taxation obligations may be minimised, particularly where members of the same family are included in the partnership (But the ATO requires that all partners have real and effective control over partnership assets and liabilities)
  • Responsibility for running the business is shared.
  • Ability to raise finance for the business is enhanced.

Disadvantages:

  • Liability is unlimited. If a partner absconds or dies, the other partners are left with the liabilities.
  • If the partnership is dissolved or altered, difficulties may be experienced in obtaining an acceptable valuation or in raising capital to purchase a retiring partner’s share

Companies

How do I set up a company?

There are a number of ways to set up a company; the easiest way of starting up a company is to buy what is known as a shelf company, and then change its name if necessary. This can be done through an accountant or solicitor or companies that specialise in selling shelf companies. You can also register a company yourself through ASIC directly.

What is a “Proprietary Limited” Company?

It is a registered private company. At least one person is required to form a “Proprietary Limited” company who must then fill the role of both Director and Secretary. Companies are required to lodge annual returns each year. A “Proprietary Limited” company cannot invite the public to invest or deposit money with it. The liabilities of the shareholders are limited to the share capital they have subscribed and any debts they may have personally guaranteed.

What is a “Limited” Company?

A Limited company is a public company consisting of at least five people who fill the roles of directors and secretary. Limited companies also have shareholders and can raise capital by offering shares to the public by issuing a prospectus.

Can I set up a company in Australia if I live overseas?
Yes, but at least one of the directors of the company or the company secretary needs to live in Australia. If it is a public company, then at least two of the directors need to live in Australia.

Advantages:

  • The liabilities of shareholders are limited to the share capital they have subscribed and any debts they may have personally guaranteed
  • It is easier to spread ownership of the company
  • The company is a separate legal entity and need not be wound up in the event of death of the directors or shareholders
  • Under the imputation system of company taxation, company tax gives rise to tax credits, which allows the company to pass on tax benefits when paying franked dividends to shareholders
  • Can issue new shares to raise capital

Disadvantages:

  • Establishment costs are high, so are administrative and compliance costs
  • Lenders will often seek personal guarantees from directors before making a loan to the company
  • Losses cannot be offset against other income of the owners
  • Directors have serious and substantial obligations under company law.

For more on how to set up a company.

Trusts

What is a trust?

A trust is a business structure whereby the trustee holds property and earns and distributes income on behalf of the beneficiaries. One of the most common types of trusts is a family trust. The trustee (usually a company) owns the property and distributes income to the beneficiaries of the trust, who are usually family members.

How does a Trust work?

Income is earned by the trust company. The trustee is empowered to distribute the trust income to the beneficiaries in accordance with the rules set out in the Trust Deed.

How do I set up a Trust?

Due to the complexity of setting up and running a trust, it is recommended that you enrol the assistance of an accountant and lawyer.

What are the advantages of a Trust structure?

The main advantage is asset protection and tax planning benefits due to the potential flexibility of income distribution to the beneficiaries.

Protecting your intellectual property

Are you considering a partnership?