Your business or legal structure is an important consideration when starting a business and we recommend getting advice from a qualified independent business, financial or legal advisor.
Sole trader – a type of structure where the business has no separate legal existence from its owner. As a sole trader you will be responsible for the liabilities of your business. A sole trader has complete control of the business, including ownership of all profits and business assets, and personal responsibility for all debts.
The sole trader has the choice to trade under their own name or under a registered business name.
As a sole trader, you will be liable for tax as an individual, which means you will be required to declare income from your business in your personal tax return. You will also normally be required to make pay as you go (PAYG) tax payments according to the marginal rate of tax for your annual income. Depending on, among other things, how much your business turns over per year, you may also be required to register for goods and services tax (GST) and remit GST to the Australian Taxation Office.
Partnership – is a type of structure where two or more people (but no more than 20) start a business and can legally share profits, risks and losses according to terms set out in a partnership contract. Like the sole trader structure, a partnership is not an entity separate from its operators. A partnership is an association of people who carry on business in common.
You and your partners may set limits on how much each of you can be liable for between yourselves, but legally, each participating partner’s liability to creditors is unlimited. This means that all partners are collectively responsible for all business debts. In this respect, the partnership structure has greater liability than being a sole trader because as a partner you are not only liable for your own acts, but also for the acts of your partners, over which you may have little or no control.
Company – is a legal entity separate from its shareholders. A director of a company has additional legal and reporting obligations. The law regards a company as a distinct legal entity separate from its shareholders or officers. Like any individual person (a natural entity), a company (a corporate entity) can own property and can sue and be sued. In Australia, companies are more regulated than other business structures.
The most common types of companies are:
- public companies (denoted by Limited or Ltd after their name)—these are usually formed to raise or borrow public money through listing the company’s shares for trading on a stock exchange. Public companies require at least one shareholder (or member) and three directors. All companies are governed by the Australian Securities and Investments Commission (ASIC), and public companies are also subject to the rules of the Australian Stock Exchange.
- proprietary companies (denoted by Pty Ltd after their name)—these do not and cannot raise money from the general public through share issues. They only require one director and one shareholder (or member).
Small businesses structured as companies usually operate as proprietary companies rather than public companies.
Trust – is a relationship where a business is transferred to a third party who has legal control and has a duty to run that business to benefit someone else. A trust is a relationship where a trustee (an individual or a company) carries on business for the benefit of a range of people (the beneficiaries). It is commonplace for the trustee of a trust to be a company (a corporate trustee) because this is often more tax effective.
A trust is not a separate legal entity. It is a relationship under which the trustee holds property for the benefit of the beneficiaries. For instance, a trustee may carry on a business for the benefit of a particular family and distribute the yearly profit to them. A trust may be discretionary (i.e. be able to benefit a range of people in the proportions that the trustee decides) or have fixed interests (i.e. will benefit certain people in predetermined proportions). Trust income is usually distributed among a wide range of people, often including the extended family of the business principal.
Qld Government – Dept. of Employment, Economic Development and Innovation