If you are planning to run a small business in Australia, you should first know the specific business modules set by the Australian Taxation Office. In general, there are four key business structures from which you can choose according to your convenience. The four primary business structures are – Sole Trader, Partnership, Company, and Trust.
Details On The Four Business Structures
- Sole Trader
A single individual runs a sole trader business, and it costs the least amount of money. As the only owner, you will have total control over the business administration and management. Due to the same reason, you will remain legally liable for different business outcomes like debts and losses. The main features of this structure are as follows.
- If you employ other workers and pay your super, you should pay their super, too.
- One of the beneficial features is that your personal tax file number can be used when you lodge the sole trader tax return.
- In your individual tax return, all your income can be included. You can go to the business items section and show every business earning and expense because there is no separate business tax return.
- If your business’s turnover is $75000 or more annually, your business is open to be registered for GST.
- You can pay the tax at the same income tax rate as individual taxpayers.
- A deduction can be claimed for any personal super contributions.
In the case of a partnership business, two or more people or entities own a business. Here, the total income of the business is distributed between the partners. If you and one or more family members or friends want to operate a business together, it can be called a partnership business. Though slightly costlier than a sole trader, it is also cheaper than other business structures. The main features of this structure are:
- The control for the business is shared among the partners.
- Whenever you become partners, you should have a written document for the agreement. It should include the pattern of distribution of losses and income. It will benefit you in many ways, from preventing any chance of disputes and misunderstandings to lodging the tax.
- Here also, the owners need to pay the super for their employees, along with their own.
- Unlike a sole trader, a partnership should have its own TFN or Taxation File Number. The returns should be lodged with all the yearly income and deductions.
- There is no need to pay the income tax on the earned profit. A partnership share is included in the portion of the tax returns of each partner.
- For sole traders, no ABN or Australian Business Number will be needed. But, ABN will be required for a partnership.
- If the annual turnover for your business is $75000 or more, it should be registered for the GST.
To set up a company business structure, you have to bear higher administration expenses. Here the owners are called stakeholders, but it is the directors who actually control the business. The main characteristics of the company are:
- A company structure offers more protection for assets. And so, the directors are responsible for any debt or action.
- A Taxation File Number will be required for the company structure, which will be used for tax return lodgement.
- If the company is registered with the Corporations Act 2001, it should have an Australian Business Number. However, if your business is not registered with the Act, it should be registered if you want to operate your business as an enterprise.
- You have to lodge an annual tax return regularly. Also, the income tax should be paid at the standard company tax rate through ‘Pay As You Go’ instalments.
- The money that your company will own should be the earned profit for the business.
- If the annual business turnover is $75000 or more, you have to register the company for GST.
- The super guarantee contributions should be paid for the eligible workers only.
For a trust structure, the business is run by either an individual or a company. The business operator is the trustee, and the trustee decides the income distribution pattern for the beneficiaries. And so, this structure is also pretty expensive. Various features of this structure are:
- A trust should have its own TFN, too, and it will be used while lodging the tax return.
- It should also have the unique Australian Business Number.
- GST registration will be required for the trust structure, too, if the annual turnover is $75000 or more.
- For a trust structure, payable tax depends on the trust deed and certainty about the tax income distribution among the beneficiaries. If the adult beneficiaries do not receive the distributed income, there will be no need to pay the tax.
- All the beneficiary super should be paid by the trust.
Which Factors Should You Consider At The Time Of Selecting The Structure?
The first and foremost factor that you should consider is the specific requirements for the business. In addition to it, the other factors are necessary licenses, amount of payable tax, your position in the business structure, the extent of your control over the business, and how much running costs and paperwork are involved in each. Whatever the small business structure you choose, you should keep in mind the accounting services strategies.
What Will Be The PSI For Each Business?
PSI means personal services income. It is different for the different Australian business structures. For both partnership and sole trader, owners can receive this PSI if the skills and efforts of the owner help the business receive payment. On the other hand, if such a thing happens for a trust or company, the owners have to check whether the PSI rules apply.
There are other two structures also in Australia. One is co-operative, a five member-run and owner business structure. Another one is incorporated association, which is used for cultural, recreational, and charitable causes. For any guidance, you should seek help from professionals who have years of experience in this sector.