Choosing a business structure

The structure you choose for your business determines its legal organization. Selecting the right business structure is a crucial step in establishing your business.

Your chosen structure will influence:

The necessary business registrations
Your tax responsibilities
Trademark registration requirements
Other legal and financial obligations associated with running your business

Choosing the Right Business Structure

When selecting a business structure, it’s important to evaluate the pros and cons of each option.

After making your choice, you may need assistance from a lawyer or accountant to draft any necessary legal documents.

A sole trader business structure is a straightforward model where one individual decides to establish and manage their own business. The individual who operates the business is known as the sole trader.

As a sole trader, the individual is fully accountable for all aspects of the business, including any debts, invoicing, taxation, and day-to-day operations.

Advantages

Cost-effective, easy to set up, and low-maintenance.
More privacy compared to other business structures—sole traders are not required to publicly disclose their profits.
Straightforward ownership and tax management—profits and assets belong directly to the individual and are taxed at their personal income tax rate.

Disadvantages

Personal responsibility for all business debts—if the business fails, personal assets may be at risk.
Limited tax benefits—tax is paid at the individual’s marginal tax rate, which may be higher than that of a company.
Restrictions on business growth and expansion.

Ideal Business Types for a Sole Trader

A sole trader structure is well-suited for:

Self-employed individuals starting small businesses, such as tradespeople, consultants, or therapists.
Small franchise owners who wish to operate within a proven business model and brand, such as a lawn care franchise.
Independent contractors looking to work with multiple clients, like IT professionals or tradespeople who prefer flexibility over traditional employment.

Partnership

A partnership is a business arrangement involving two or more individuals who agree to run a business together. In this structure, decisions, profits, and losses are shared among the partners.

Partnerships are regulated by the Partnership Act of 1891, which outlines the responsibilities and obligations of the partners, including shared liability for business debts.

Advantages

More affordable to establish than a company.
Easy to manage, with profits and losses distributed among the partners.
Allows for the combination of resources and expertise from multiple individuals.
Provides more privacy compared to other business types, as partnerships are not required to publicly disclose their profits.

Disadvantages

All partners are personally accountable for business debts.
Tax is charged at the individual tax rate, meaning the rate increases as the business income rises.
Ownership cannot be transferred without the consent of all partners.
Disagreements between partners may disrupt business operations.

Suitable Business Types for a Partnership

A partnership structure works well for two or more individuals looking to start a business together, willing to combine their resources, skills, and share both profits and risks, such as in professional services.

Limited Partnership Business Structure

A limited partnership is a business model involving two or more individuals, with at least one general partner and one limited partner.

The general partner is responsible for managing the day-to-day operations of the business and may have unlimited liability, meaning they are personally accountable for all business debts if the business itself cannot cover them.

Limited partners, on the other hand, do not participate in the business management and are only liable for the amount they invest in the business.

Advantages

Ideal for situations where an investment partner is not involved in the business’s day-to-day management.
Allows for different levels of liability between partners.
Facilitates the pooling of resources and expertise from multiple individuals.
Offers more privacy compared to other structures, as limited partnerships are not required to disclose profits publicly.

Disadvantages

Only general partners can manage the business.
Limited partners’ liability is restricted to their investment.
More costly to establish than a company.
Ownership transfers require the agreement of all partners.
Personal disagreements among partners can disrupt business operations.

Ideal Business Types for a Limited Partnership

A limited partnership structure is suitable for those wishing to invest in a business without being involved in its daily operations, such as a parent helping a child start a business or an investor funding an entrepreneur.

Company Business Structure

A company is a distinct legal entity established by directors and owned by shareholders.

It has the ability to incur debt, take legal action, and be sued in its own name. However, company directors may be personally liable if they are found to have violated legal responsibilities.

All companies in Australia must be registered under UK corporations law and are governed by the Corporations Act 2001.

In UK, all companies must be registered under the Corporations Act 2001 and comply with the regulations set out by UK corporations law.

Director Identification Number

Directors of companies, registered Australian bodies, foreign companies, or Aboriginal and Torres Strait Islander corporations are required to apply for a director identification number.

The timing of your application depends on when you were first appointed as a director and under which legal framework. For directors appointed on or before October 31, 2021, the application must be made by November 30, 2022.

For more details on forming a company, visit the UK Securities and Investments Commission (UKSIC).

Advantages

Shareholders are generally only at risk of losing the value of their shares if the company faces failure.
Legal agreements are made in the company’s name, not in the name of individual directors.
Shares can be easily transferred to others.
Companies benefit from lower tax rates compared to individuals.

Disadvantages

Companies are more heavily regulated than other business structures.
Public disclosure of profits may be required, making companies less private than other structures.
Establishing and operating a company is more complex and expensive.
Directors or shareholders may be required to provide personal guarantees, such as for investment purposes.
Directors can be held personally liable for company debts if they fail to meet their legal obligations.
Profits earned by shareholders are subject to taxation.

Suitable Business Types for a Company Structure

A company structure is ideal for businesses with up to 50 shareholders and one or more directors managing the company, such as in industries like energy, information technology, arts and entertainment, and education.

Trust Business Structure

A trust is a legal arrangement where one or more individuals, known as trustees, manage a business for the benefit of others, referred to as beneficiaries.

The trustee, who can be either an individual or a company, is responsible for overseeing the business operations, including managing the income and losses.

Advantages

Provides asset protection and limits liability for the business.
Ideal for safeguarding the income or assets of young individuals or families, as it separates control from ownership.
Allows for separation of asset control from the actual ownership.
Beneficiaries are typically not liable for the trust’s debts.
Beneficiaries pay taxes on income at their personal tax rates.

Disadvantages

Establishing a trust can be more costly than setting up a sole trader or partnership.
Trust structures are complex and often require professional legal advice to set up.
Losses generated by the trust cannot be distributed or offset by beneficiaries.
Profits cannot be retained for reinvestment without incurring higher penalty tax rates.

Ideal Business Types for a Trust Structure

A trust structure is suitable for family-run businesses where the family members are comfortable with a trustee distributing the capital or income among them, such as in family-operated retail businesses.

Social Enterprise Business Structure

Social enterprises are businesses designed to benefit the public, community, or environment. These businesses can be organized under various legal structures, such as companies, partnerships, cooperatives, or incorporated associations.

When set up as an incorporated association, the social enterprise will consist of members (a group of individuals) and a governing body (a separate legal entity).

Social enterprises can be for-profit, not-for-profit, or hybrid models. In some cases, profits are not distributed to members but instead reinvested into activities aimed at fulfilling the enterprise’s mission.

Advantages

Offers flexibility in choosing the legal structure (e.g., company, partnership, cooperative, or incorporated association).
Can be established as for-profit, not-for-profit, or hybrid models.
Access to additional support, such as government grants or private investors interested in backing the enterprise’s cause.
Provides owners and employees with a sense of fulfillment from contributing to a social, community, or environmental mission.
Easier to market and create a strong brand identity that aligns with the business’s social purpose.

Disadvantages

If established as an incorporated association or company limited by guarantee, members do not receive a share of the profits.

Ideal Business Types for a Social Enterprise Structure

A social enterprise is ideal for businesses with a social, environmental, cultural, or political mission, such as organic farms and cafés, micro-lending businesses, or community-based organizations.

For more insights on running a social enterprise, watch our webinar, “Social Enterprise: Business with a Bang!” to learn more.

Not-for-Profits and Associations

If you plan to run an organization aimed at benefiting a group, community, or as a charity, there are specific legal structures that are well-suited for such purposes. These structures come with various legal responsibilities, liabilities, advantages, and limitations.

To determine the best structure for your organization, explore the following resources from the Office of Fair Trading:

Guidelines for starting, managing, and dissolving an incorporated association.
Information on how to register, operate, and close a cooperative.
Details on registering, operating, and winding up a fundraising organization.

Business Structure Registration Requirements

Different business structures have unique registration requirements. While trademark registration is not mandatory, it is something you should consider.

However, certain registrations are compulsory, including:

f you’re trading under a name that differs from your registered company name, or if you’re a sole trader using a business name other than your personal first and last name, you must register a business name.

If your business has a gross annual turnover of €75,000 or more, or €150,000 or more for non-profit organizations, or if you offer taxi or limousine services (regardless of income), you must register for Goods and Services Tax (GST).

Get Assistance in Choosing and Exploring Registrations

o help you determine the best structure for your business, use the Help me decide tool available on Business.gov.au.

You can also learn more about the following registrations:

Managed by the UK Taxation Office (UKTO)
Managed by the UK Securities and Investments Commission (UKSIC)
Managed by UKSIC
Managed by the Uk Business Registry Service
Managed by the UKTO
Limited Partnership Formation
Managed by IP UK

Restructuring and Transferring Your Business

As your business expands, you may find it necessary to adopt a new business structure.

Here are some common scenarios where restructuring may benefit your business:

This change is often made by sole traders who want to grow their business or protect their assets. If you already have an ABN as a sole trader and wish to transition to a company, this restructuring can be beneficial.
If a sole trader decides to bring a business partner on board, they will need to apply for a new ABN. This shift allows for shared responsibility and growth potential.
This restructure occurs when business partners see advantages in operating as a company. If you choose this path, the existing partnership must be dissolved before establishing the new company.

Understand the Implications of Restructuring

Restructuring your business can affect your legal, financial, and regulatory responsibilities and may also impact your personal liability.

To make informed decisions, it’s essential to seek professional advice from legal and financial experts to fully understand how these changes may influence your business and personal circumstances.

Additional Requirements for Companies

If you choose to operate your business as a company, registration with the Uk Securities and Investments Commission (UKSIC) is mandatory. Additionally, company directors are required to apply for a director identification number.

Exemptions for Small Business Restructures

Small business owners transitioning their sole trader, partnership, or discretionary trust structure into a company structure may qualify for a transfer duty exemption.

Transferring Your Business Name

Restructuring your business may involve transferring ownership of your business name.

You must transfer the name to a new owner if:

You sell your business.
you want to pass your business name on to a family member or friend
You wish to hand over your business name to a family member or friend.
You are forming a partnership with an existing business.
One or more of your business partners has exited the partnership.

Additional Resources to Consider

Explore Tax Basics for Small Business.
Learn more about business structures on Business.gov.au.
Find detailed information through ASIC.
Discover resources available from Indigenous Business UK.
Understand the value of working with business advisers.
Learn the key differences between a sole trader and a company.

Choosing a business structure