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Australian business structures – choosing the right structure for your business

In this issue we examine the key types of business structures through which business can legally be conducted in Australia as follows:

1.     Sole proprietors: individuals who are liable for the business.

2.     Partnerships / limited partnerships: two or more persons or entities who are jointly and individually liable for the business (unless it is a limited partnership in which case the limited partner can enjoy limited liability).

3.     Joint ventures: contractual arrangements between two or more persons entities usually for a limited time or specific project whereby the rights and obligations are governed primarily by the contract.

4.     Companies: separate legal entities which basically have the same rights as natural persons and which can provide limited liability to their owners (i.e. shareholders). This can also include startups.

5.     Trusts: a person or entity that holds assets or income for the benefit of others.

Sole proprietors: Sole proprietors or sole traders conduct business as individuals i.e. in their personal capacity. Sole proprietorship is the simplest business structure, but provides no protection to the sole proprietor from debts or other liabilities.

A different trading name for the business is often used (formally referred to as a “business name”). If so, the name must be registered in the name of the individual with the Australian Securities and Investments Commission (ASIC). Please refer to the business names section at the end of this paper which applies to all persons and entities wishing to trade under a different name to their own name for additional information.

Aside from the usual laws which regulate all businesses in Australia, there are significantly fewer regulatory requirements imposed upon sole proprietors in comparison with other business structures. There is for example no need to publish financial information.

Business income is declared separately to the Australian Taxation Office (ATO) but is taxed at the same rate as individual Australian residents for tax purposes. There is a tax free threshold available for individuals of $18,200. The rates of tax for income above $18,200 are as follows:

$18,201 – $37,000 = 19%

$37,001 – $87,000 = 32.5%

$87,001 – $180,000 = 37%

$180,001 + = 45%

Tax offsets, levies, and deductions may apply depending on individual circumstances. Specific financial / tax advice should be sought from an accountant.

Partnerships: A partnership is a relationship between two or more individuals or companies who carry on business in common with a view to profit.

The relationship is primarily governed by a written partnership agreement entered into between the partners, as well as the Partnership Acts in each state and territory. Partners (other than limited partners discussed below) are jointly and severally liable for liabilities of the partnership. They also share the profits. As is the case with sole proprietors, there is no need to publish financial information relating to the partnership.

The partnership does not pay tax on its income; it is the individual partners who must declare their individual share of the partnership’s net income or loss. The partnership must however lodge a partnership return with the ATO declaring total income less deductible expenses. Individual partners also account for capital gains tax in proportion to their share of each CGT asset, not the partnership itself.

Limited partnerships are a species of partnership which need to be registered involving at least one general partner and one limited partner. Limited partners have different rights and obligations and liability is limited to an extent.

Limited Partnerships are generally taxed in the same manner as companies.

Joint ventures: Joint ventures are essentially contractual arrangements whereby two or more individuals or companies enter into a negotiated agreement to work together to achieve specific goals, usually for a finite amount of time, or the agreement is otherwise terminated. Joint ventures are typically used for specific projects, and are not usually appropriate for ongoing business commitments.

Joint ventures are commonly established where each party has different assets / resources which, when combined, can provide advantages / synergies / efficiencies to all parties. The rights of each party primarily depend on the contractual terms of the relevant joint venture agreement that has been negotiated between them. Joint ventures can be incorporated (e.g. where the parties establish a new company as the vehicle for the joint venture), or unincorporated.

The tax implications for joint ventures depend upon the parameters of the arrangement.

Australian Companies: A company incorporated under the Corporations Act 2001 (Cth) (Corporations Act) is a separate legal entity and has the same rights as a natural person.

The company must be registered with ASIC, and ASIC administers the Corporations Act and regulates companies.

Australian companies typically provide limited liability for their owners (i.e. shareholders). The directors are responsible for the day to day management of the company. There are numerous obligations and reporting requirements prescribed under the Corporations Act.

Companies can either be private (known as proprietary companies) or public (the capital of which is raised from the public e.g. those listed on the Australian Stock Exchange). The different types of company are as follows:

  • company limited by guarantee: liability is limited to a guaranteed amount. This is often used by entities that do not trade.
  • company limited by shares: liability is limited to the relevant amount which is unpaid for the shares held by the particular shareholder
  • unlimited company: liability is unlimited.
  • no liability company: only available to mining companies.  The unpaid amount for shares cannot be called upon.

The most common type of company is a company limited by shares. There are different requirements depending on the size of the company.

Small business entities pay tax at a rate of 28.5% otherwise most companies pay tax at a rate of 30%.

Foreign Companies: Companies that are incorporated in countries other than Australia must register with ASIC if they wish to carry on business in Australia.

Trusts: Trusts can carry on business in Australia. The trustee owns and manages the business for the beneficiaries of the trust. Generally, the beneficiaries pay tax on their share of the trust income.

Business names: This isn’t a business structure.  However, it is important to note that if a person or entity trades in a name other than their own name they must register the name with ASIC. Business names, and other intellectual property related information as well as ATO and licensing requirements will be covered in later publications.

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