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.

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.

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.

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.

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.

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 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.

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.