Choosing the Right Business Structure in Australia: Weighing the Pros and Cons
- August 29, 2023
- 8 min read
Embarking on a business journey in Australia requires a strategic choice: the right business structure. Our blog explores the pros and cons of various business structures in the Australian landscape. Whether you seek flexibility, liability protection, or ease of administration, join us as we navigate the avenues of business structures, helping you make an informed choice tailored to your aspirations and business goals.
Overview of Different Structures
There are approximately 20,000 new businesses started every month in Australia. For each business formed – the business owner must decide on their business structure.
Each business structure has its unique regulatory and financial implications.
Your choice will determine the level of personal income tax, personal liability, tax treatment, and control you have over your business entity.
You can consult professionals like Sleek to guide you on the best structure for your dream business.
What do you need to start your company in Australia?
You need to meet certain mandatory and minimum requirements to set up your business in Australia. You must have at least one shareholder (it could be yourself) and $1 in capital. You must hire a Company Secretary to handle compliance of your business entity, a Local Resident Director (legally required) & Public Officer (point of contact) with the Australian Taxation Office. Finally, you must have a registered business address in Australia.
Types of legal organisation, their benefits, and disadvantages
Option 1: Sole Proprietorships (or Sole Traders)
This is the simplest and most common structure in Australia. In 2021-22, sole proprietors had the largest net growth of any type of legal organisation in Australia, increasing by almost 13%. The biggest benefit of being a sole trader is that it is owned by a single person (yourself) and you have complete control over decision-making. It also has lesser reporting and registration requirements compared to other structures.
On the flip side, sole proprietorships require you to be personally liable for all taxes and finances of the business. A Sole Proprietorship has limited growth opportunities and could find it difficult to attract new investors or partners.
Need to register for an ABN? We can set you up in a matter of moments.
Option 2: Partnerships
Here, two or more individuals (for instance, you and a friend or family member) share ownership, responsibility, and business profits of the business entity. This allows you and your partners to share decision-making and pool resources, skills, and knowledge. A partnership is also easy to set up.
But, bear in mind that each partner has unlimited liability for the business’s debts. There could also be differences of opinion between the partners, and as in any collaborative structure, difficulty in transferring ownership.
Option 3: Company (PTY LTD), also called a Limited Liability Company (LLC)
The PTY LTD structure stands out as a popular choice for its limited partnership feature. It is ideal when you want to limit your legal and financial liabilities from the business. A Limited Liability Company is a separate legal entity from its owners, and your personal assets are generally protected from financial liability. This structure has a lot of growth potential and can interest many individuals to invest. You can also raise capital easily by issuing shares in the business.
However, setting up a limited liability company (LLC) is complex and expensive, and requires adherence to corporate governance principles.
Setting up a limited liability company?
Case Study: Establishing a PTY LTD Company in Australia – A Journey to Success
Jane, an aspiring entrepreneur in Australia, decided to start a limited liability company to pursue her passion for eco-friendly products. After conducting detailed market research and developing a business structure and plan, she registered her business name with the Australian Securities and Investments Commission (ASIC). Jane secured funding from personal savings and a small business loan.
She obtained the necessary licenses and permits to ensure compliance, including an Australian Business Number (ABN) and Tax File Number (TFN). She hired an experienced service to manage financial aspects and ensure adherence to tax regulations.
With a dedicated team and innovative products, Jane’s PTY LTD company gained popularity among environmentally-conscious consumers, leading to steady growth and a successful venture.
Option 4: Trust
A trust is a slightly different structure because the person managing the setup (“trustee”) may not own it directly. Also, it has the potential of a long-term operation, going far beyond the lifespan of beneficiaries.
In a Trust, the trustee holds property or assets on behalf of beneficiaries. This allows the trustee to distribute the trust income among its beneficiaries. This structure is useful for asset protection and tax planning because you can avail of “tax-exempt” status. This status is available to small businesses or not-for-profit entities.
The downsides? Setting up a Trust is quite complex and the Trustee has many legal responsibilities. A Trust finds it virtually impossible to raise additional capital.
It is better to consult experts such as Sleek to set up and manage a Trust in line with applicable
Regulations.
Types of Entities | Pros | Cons |
Sole Proprietorship (Sole Traders) |
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Partnership |
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Company (PTY LTD)/Limited Liability Company (LLC) |
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Trust |
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Key Considerations for Starting a Business
Before starting your business you must draw up a checklist to ensure you do not miss out on mandatory requirements. These include:
Licenses or Permits
Starting a business in Australia often requires specific licenses or permits depending on the type of business and location. These include a Business Number, Business Name registration, GST number, and trade licenses for specific businesses.
Corporate Bank Account
Your business must have a corporate bank account such as a Transaction Account, Savings Account, or Business Term Deposits
ASIC Company code
The ASIC (Australian Securities and Investments Commission) company code is a unique identifier assigned to registered companies in Australia.
Company name
Choosing a company name is a significant step. It should align with your business’s identity and goals.
Legal agreements
Legal agreements such as shareholders’ agreements, partnership agreements, or company constitution establish the structure, ownership, and governance of the company.
Insurance
Every company must have insurance to protect it from various risks and liabilities. Insurance types include Public Liability Insurance, Product Liability Insurance, and Workers’ Compensation Insurance
Grants or funding
Australia offers a range of grants and funding options to support startups and new businesses. They are provided by both government agencies and private organisations. If you are interested in how much it costs to start a business? Read out helpful blog.
