When starting a business in Australia , one of the key decisions that entrepreneurs must make is how to structure their business. This decision can have significant legal and tax implications, so it's important to understand the pros and cons of each option before making a choice. In this article, we cover the most common types of legal entities for Australian startups, and the tax implications of each.
Tax Implications of Carrying on Business as a Sole Trader
Carrying on business as a sole trader is the simplest and most straightforward structure. It’s suitable for a single person who wants to start a business. As a sole trader , you’ll be taxed at the same rate as individuals, simplifying tax reporting with no separate entity for which to prepare financial reports and lodge tax returns. But a big drawback is that you’ll be personally liable for the debts of the business.
Tax Implications of Carrying on Business in a Partnership
A partnership is where two or more people come together to run a business. Each partner is personally liable for the debts of the business, and is also taxed on their share of the partnership's income. This simplifies tax obligations but requires clear agreement on profit sharing.
Partnerships are relatively easy to set up and have no annual financial reporting requirements, but there is some complexity in managing, adding a new partner and dissolving.
Tax Implications of Carrying on Business in a Company
A company is a separate legal entity from its owners. This means that shareholders are generally not liable for the company's debts. Companies may have annual financial reporting requirements, and are subject to corporate tax rates (25% for companies carrying on a business and turning over up to $50 million for the 2022/23 tax year).
Companies can be more expensive to set up and run than sole traders or partnerships, but offer limited liability to shareholders, potentially reducing personal exposure to risk .
Tax Implications of Carrying on Business in a Trust
A trust is a relationship where assets are held by a trustee not for its own benefit but rather for the benefit of another person or persons (the beneficiaries). The trustee can carry on a business for the benefit of the beneficiaries of the trust. Trusts can be used effectively to obtain a form of limited liability similar to companies and offer flexibility in distributing business income, but come with complex administration and tax rules.
What is the Best Business Vehicle for your Startup?
In most cases, getting your startup set up in the right business vehicle will come down to choosing between either a company or a trust. We compared these two options in detail and handed down our verdict in the article, Company vs Trust: Understanding Startup Structures . The choice is also informed by your specific circumstances, so consulting a qualified advisor is key.
Consider Risk When Choosing Your Startup’s Structure
When choosing the right legal entity for your startup, it's important to consider the size and scale of your business, your personal risk tolerance, and your long-term goals. For example, if you're starting a small business and you're comfortable with assuming a level of personal exposure to risk, a sole trader or partnership may be the best option. However, if you expect growth (for which a lot of entrepreneurs strive) and you want to limit your personal risk, a corporate structure may be more desirable. Check out more tips for startups to reduce legal risk , and remember that changing your business structure can be a costly exercise, so it’s important to get it right.
Tax Implications of Different Business Structures
Let’s wrap it up. When it comes to tax implications, a big difference between the business vehicles considered above is the rate of tax the business’ income is ultimately subject to. For example, sole traders and partnerships are subject to the same tax rate as individuals, while companies are subject to corporate tax rates. Additionally, trusts are inherently complex but arguably offer the greatest flexibility in tax planning.
Get Help Structuring Your Startup or Business
It's best to consult with a specialist tax consultant to determine which business structure is best for your startup, based on your specific circumstances and goals. Get in touch to book a consultation on the best business vehicle for your startup with our advisors today.
