The basics of Australian business structures

Sometimes referred to as business models, the structure of your business defines how you operate and what laws you abide by. Let's have a look at the four most prominent structures in Australia.

Sole trader

Most people who want to run a business, start off as a sole trader. It's the smallest and least complicated structure, giving you complete control of how you run your everyday operations.

If you're a sole trader, you don't need to register as a separate business. You can trade under your own name and use your Tax File Number (TFN) to manage your taxes.

Read also: Changing ownership of your sole trader business vs transitioning to a partnership

Partnership

A partnership business is when two or more people come together to run a business in shared interest. They create a written partnership agreement to define the basics of everyday operations. Unlike a sole trader, a partnership business requires a registration, along with a TFN and Australian Business Number (ABN).

There's an annual partnership tax, and if the business's annual revenue exceeds $75,000, it will have to apply for a GST registration. That said, the business itself does not pay any income tax. Instead, each partner includes their salary and share of the business's profit in their income tax returns. They also organise their own superannuation as the business isn't entitled to offer super.

There are three types of partnerships:

1. General partnership

In this structure, all partners share responsibilities equally. They also have unlimited liability, which means that if the business incurs a loss, the partners are held personally accountable for paying off the debt.

2. Limited partnership

As the name suggests, partners have limited ownership of profit and liability in this partnership business. A partner's liability depends on their contribution towards the business's capital or as otherwise specified in the partnership agreement.

3. Incorporated limited partnership (ILP)

An ILC is a combination of both general and limited partnerships. There are two types of partners: general partners (1-20 people) who are completely liable if the business cannot cover losses, and limited partners with limited liability.

Unlike the other two partnership structures, ILPs are a separate legal entity. It's the most popular choice for high-risk enterprises like venture capital (VC) businesses. VCs can be classified into four categories based on the type of venture investment. All four are considered ILPs.

Company

Australian companies follow the guidelines outlined in the Corporations Act of 2001, and the ASIC regulates their operations. Companies are separate legal entities and have their own TFN and ABN. While shareholders own a company, a board of directors manages and runs it.

Companies have to pay an annual company tax and, if the annual revenue is over $75,000, register for GST.

At the end of each year, the board of directors reviews business progress and assets. During this time, they also sign a declaration of solvency to certify that if the directors decide to close the business, the company will remain solvent for the next 12 months to pay off all debts and sell their remaining assets.

You're required by law to keep financial records and inform the ASIC within 28 days of any changes.

Companies can be privately held or public.

1. Private or proprietary company (Pty.)

Shareholders (also called members) solely contribute to the capital of a private company. As a fundamental regulation, private companies can't raise further funds from the public.

To start trading as a company, you need at least one member, a director, and a physical office space, although it's optional on whether to open the office to the public. As a private company, you can have up to 50 members, and each member's liability can be either limited or unlimited based on their share value.

Private companies are further classified as small and large based on the number of employees, amount of revenue, and asset value. Additional taxes and concessions apply according to these classifications.

2. Public company

A public company can have an unlimited number of shareholders. However, to start trading, you'll need:

• At least one shareholder

• Three directors, two of whom should be Australian residents

• One secretary

• An office that's open to the public during normal work hours

As part of your annual review, you need to provide business reports to the ASIC, make your constitution available to shareholders, and conduct an Annual General Meeting with 28 days' notice to shareholders.

Public companies are further categorised into three types based on shareholders' liability:

• Limited by shares or guarantee (Ltd.)

• Unlimited liability

• No liability - this applies only to specific mining companies in Australia

Most public companies enlist in the stock exchange for the public to purchase shares and become a shareholder. However, it's also possible for a public company to remain unlisted.

Companies can be listed in the stock exchange in three ways:

• Single listing companies

These are public companies listed in only one stock exchange, typically in the country they operate. Australian companies are usually listed in the ASX.

• Dual listing companies

This refers to two companies, often in different countries, that operate as one through a legal agreement. Both remain as separate companies listed in their respective stock exchanges, benefiting from both. These companies often have the same board of directors and share projects and operations.

• Cross listing companies

This is a company that is listed on multiple stock exchanges. It requires the company to comply with the laws of each stock exchange for which it's listed. The primary listing of such a company will be in the country where its headquarters are, while other listings are secondary. For example, an Australian company can enlist in the ASX (primary), as well as the NYSE (secondary) and the London Stock Exchange (secondary). Cross listed companies are often multinational corporations that have large-scale operations across various regions.

As we mentioned earlier in this post, most businesses start off as sole traders and then change structures as they grow. The same applies for companies. If you're a private company for instance, you can transition to a public company, whether listed or unlisted. Here's ASIC's guide on how to change your company type.

Read also: Changing from a sole trader to a company

Trust

A popular type of business structure, Australian trusts follow the Australian Trust Law. Individuals can establish trusts, which protect personal assets from losses and pass them onto the individual's beneficiaries. These assets can include real estate, art and antiques, jewellery, shares, bonds, and cash.

The person setting up a trust is a trustor (also called a settlor, grantor, or donor), and they'll hand over their assets to a trustee for safekeeping and effective management.

Once a trustor creates the trust, they will no longer own any of the assets included in the trust. It's a form of changing ownership. This ensures that the assets aren't depleted to repay any debts that the trustor may incur.

The trustee(s) registers the trust and maintains its annual trust tax. The trustee can be the trustor themselves, a third-party individual, or a company (i.e. banks, trust companies).

The trust itself doesn't pay income tax because the beneficiaries include their share of the trust's income or profit in their personal tax returns. In case of minor or non-resident beneficiaries, the trustee pays those tax liabilities on their behalf.

Depending on the purpose of the trust, there are four types:

• Family or discretionary trust

Ideal for small-scale trusts where a family member chooses to distribute their assets to select beneficiaries.

• Unit or fixed trusts

The trustor doesn't choose who benefits or how much. This is a non-discretionary trust where assets are broken down into units. Each beneficiary owns a specific number of units (unit holder) and receives corresponding funds.

• Hybrid trusts

This is a combination of discretionary and unit trusts. Although the trustor chooses who benefits from the trust, the assets are still divided into units and beneficiaries receive funds based on how many units they hold.

• Special disability trust

This type is exclusive for carers and immediate family members to set up a trust on behalf of a person with a disability in their family. Read more about setting up and managing trusts on the ATO website.

Regardless of the size, starting a business is a tough climb. Fortunately, though, Australian laws are quite business-friendly, and so you can learn the ropes as a sole trader or a partnership business before taking on a bigger venture. We hope this post gives you an overview of the different options available to help you on your journey.