After you decide you have what it takes to start and run your own business, and you chose which type of business is right for you, your next step is deciding which business structure will best suit your needs.
The three most common types of business structures include:
You should carefully consider which structure is right for you as each one carries different liability and tax burdens.
Sole Trader features:
The simplest structure with just one owner. Compared with the other business structures, operating as a Sole Trader is the cheapest option to set up and the easiest to administer. All profits and growth accrued go to the sole owner.
Sole Trader Tax status and liabilities:
Profit from the business is considered personal income of the owner and personal income tax rates apply. Legal liability and protection of personal assets, are two areas where operating as a Sole Trader is a major disadvantage. In the event of a legal claim against the business, where insurance does not cover the full extent of any damages awarded, the owner’s personal assets can be attacked to pay the damages.
When a minimum of two people join to form a business and jointly share profits and losses. Set up costs are lower than for a company. Partnerships can be agreed upon verbally or in writing, however, it would be prudent to establish a “Partnership Agreement” between the parties entering into the partnership. The agreement should outline the rules and responsibilities of each of the business partners and determine ownership of the business.
Partnership status and liabilities:
As with a sole trader, legal liability is unlimited and can extend to the personal assets of all partners. Each partner pays personal income tax on the income earned from the partnership at their personal tax rate. The partnership is not taxed, but does require the completion of a partnership tax return and its own Tax File Number (TFN).
Limited Liability Company features:
A limited company (a Ltd Company) is a company in which the liability of the members or subscribers of the company is limited to what they have invested or guaranteed to the company. A company has shareholders who own the company and a board of directors to manage it.
Limited companies may be limited by shares or by guarantee. The former of these, a limited company limited by shares, may be further divided into public companies and private companies.
Limited Liability Company status and liabilities:
A company is a distinct legal entity which pays its own tax at the company rate of taxation. The owners of the company are taxed on the salaries they are paid by the company and any fees earned as a director of the company. Unlike with sole traders or partnerships, liability is limited for any debt incurred by the business.
Still not sure which business structure is right for you?
Take advantage of our FREE business Structure Wizard. It only takes 60 seconds.
Simply answer a few questions relating to your proposed business and within seconds you will receive the most appropriate business structure suggestion based on the information you provided.
Need more in-depth information? Read more about setting up a business structure.