Choosing the Best Business Structure.

When you’re starting or growing a business, one of the first and most important decisions you’ll make is choosing the best business structure for your situation. This choice has long-term effects on how much tax you pay, how you’re treated by the law, how you can distribute profits and even how you can raise capital.

In this article, we explore four common business structures in Australia and the pros and cons of setting up as a Sole Trader, Partnership, Company, and Trust.

We’ll also touch on some key considerations just for Franchises.

1. Sole Trader: The Simple Start
2. Partnership: Sharing the Load
3. Company: Separate Legal Entity
4. Trust: Protecting Assets for the Future
5. Special Considerations for Franchises
6. Key Takeaways

Sole Trader: The Simple Start

What is a Sole Trader business structure?

A sole trader is an individual running a business on their own. It’s the simplest business structure, with minimal setup and registration costs.

Advantages of setting up as a Sole Trader:

• Easy to set up – Less paperwork and low start-up costs.
• Full control – You make all the decisions and keep all profits.
• Tax simplicity – You’re taxed as an individual, which can be straightforward.

Disadvantages of setting up as a Sole Trader:

• Unlimited liability – If things go wrong, your personal assets (like your house or car) could be at risk.
• Limited growth potential – It can be harder to raise funds or expand the business.
• No shared workload – You wear all the hats, which can be exhausting!

Partnership: Sharing the Load

What is a Partnership business structure?

A partnership involves two or more people (or entities) who run a business together. It’s common in small businesses where people want to pool resources and share the responsibilities.

Advantages of setting up as a Partnership:

• Shared responsibilities – Partners can bring different skills to the table and share the workload.
• Combined resources – More heads (and wallets) can lead to more opportunities for growth.
• Flexible structure – You can create a partnership agreement to set out roles and expectations.

Disadvantages of setting up as a Partnership:

• Joint liability – All partners are personally liable for the business’s debts and decisions.
• Shared profits – Profits must be divided equally.
• Potential for conflict – Disagreements between partners can affect the business.

Company: Separate Legal Entity

What is a Company business structure?

A company is a separate legal entity from its owners. It can be private (Pty Ltd) or public, and it offers more protection for the owners’ personal assets.

Advantages of setting up as a Company:

• Limited liability – Shareholders (owners) are usually only liable for the amount they invested.
• Tax benefits – Companies are taxed at a flat corporate tax rate, which may be lower than individual rates.
• Growth potential – It’s easier to raise capital through the sale of shares.

Disadvantages of setting up as a Company:

• Complex setup – More paperwork, regulations, and compliance requirements.
• Ongoing costs – Companies need to comply with ASIC regulations, which can involve higher costs.
• No CGT discounts – Companies are not eligible for the 50% general CGT discount. This is something to watch out for if you plan on selling your business at a later stage.

Trust: Protecting Assets for the Future

What is a Trust business structure?

A trust is a structure where a trustee (an individual or company) holds assets on behalf of beneficiaries. Trusts are often used for asset protection, tax management and estate planning.

Types of trusts: Discretionary and Unit Trusts.

There are two key types of trusts used for business structures:

Discretionary Trusts

Trustees have the ability to determine how profits and capital are distributed to beneficiaries each year, allowing for greater flexibility and robust tax planning.

Unit Trusts

A bit like holding company shares, beneficiaries are allocated “units” in the trust. These units give the beneficiary (aka “unitholder”) a fixed share of the trust’s income and capital distributions.

Advantages of setting up as a Trust:

• Asset protection – Trusts can shield assets from creditors or legal actions. This means you can run a trust for a business or personal investment.
• Tax flexibility – Income can be distributed to beneficiaries in a tax-effective way.
• Succession planning – Trusts are a common tool for passing wealth to the next generation.
• CGT discounts – Trusts are eligible for the 50% general CGT discount.
• Several structure options – Can be set up as a discretionary, unit or hybrid trust, based on how much flexibility and discretion you wish to have around how profits and capital are to be distributed.

Disadvantages of setting up as a Trust:

• Complex administration – Trusts can be complicated to set up and manage. 
• Ongoing costs – There are often higher accounting fees and complex structures may require further legal advice. It can be difficult and costly to dissolve or change a trust.
• Limited lifespan – Where companies can exist forever, most trusts have a lifespan of 80 years, after which assets must be transferred.

Special Considerations for Franchises

Franchising is another business option where you operate under the umbrella of an established and recognised brand.

If you’re thinking about buying into a franchise, your choice of business structure still matters. That’s because you don’t technically ‘join’ the franchisor’s business. Instead, you set up your own entity which enters into a legal agreement with a franchisor and operates using their brand.

As a franchise, you may have some flexibility in choosing your business structure. However, most franchisees set up companies or trusts, as these structures can offer you better asset protection and tax planning.

In some cases, your franchise agreement may require you to adopt a specific structure, often a company, which allows the franchisor to limit their liability and standardise operations across all of their franchisees.

For franchisors, a company structure is the most common due to the need for limited liability and the ability to scale.

Key Takeaways

Choosing the best business structure depends on your goals, how you want to manage your business, and what risks you’re comfortable with. Here’s a quick summary:

• Sole Trader: Simple, low cost, but full personal liability.
• Partnership: Shared workload and costs, but potential for conflict and joint liability.
• Company: Offers limited liability and tax benefits, but comes with more paperwork and costs.
• Trust: Great for asset protection and succession planning, but complex to set up and maintain.
• Franchises: You may be able to choose your set up. Most set up companies or trusts for asset protection and tax planning purposes.

Remember, your business structure will affect how much tax you pay and how you’re treated by the law. It’s worth getting advice from the experts to make sure you’re set up for success.