Your Guide to Changing Business Structures

As a new business owner, one of the first tasks on your checklist is to decide the legal structure of your business. There are a number of different ways to set up a business, and they all come with their own unique tax, finance and liability implications —which is why it’s important that you do your research before locking in your structure. That said, the legal structure of a business tends to be guided by the size, type, and how you want to run it. In terms of your options, the four most common structures in Australia are a sole proprietorship, partnership, company, or trust. In this post, we explore the appeal of the latter – a trust. For many, it’s the unconventional choice due to its setup costs and inflexibility once established. However, trusts —typically favoured by family-owned businesses — arguably offer greater protection and reduced liability than other business structures. After reading this article, you should have a better idea of whether a trust structure is right for your business. What is a trust in business? The Australian Government defines a trust as “an obligation imposed on a person (a trustee) to hold property or assets (such as business assets) for the benefit of others, known as beneficiaries”. What this essentially means is setting a business up to be carried out by a person or company (the trustee) on behalf of others (the trust’s members, or ‘beneficiaries’). A trustee’s specific obligations are outlined in a trust deed. A trust is a complex but flexible structure, with clear benefits for the right type of business. The trustee is legally liable for all of the trust’s debts. It can, however, use its own assets to cover those debts, but if those assets fall short of the outstanding sum, the trustee is responsible for footing the difference. As for what a trust is not, it’s quite simple: a trust is not a separate legal entity. Can a charitable trust do business? Charities registered as trusts are commonly known as charitable trusts. Unlike a traditional trust, a charitable trust is established purely for charitable purposes . This purpose means it doesn’t have to adhere to the rule against perpetuities, it does not have named beneficiaries, it is heavily controlled by the law, and there are sizable tax concessions. As it is established for charitable purposes, a charitable trust is not technically a business. However, they are often established as ‘ investment strategies ’ that allow you to grow your wealth while also making a meaningful difference for those less fortunate. Business trust advantages and disadvantages There are a number of advantages afforded by a trust business structure, the main advantage being its relative flexibility. Trustees have the power to distribute income at their discretion. There is also reduced liability and increased asset protection, particularly if it’s a corporate trustee. In addition, beneficiaries are not liable for debts, and pay tax on income they receive from the trust at their own marginal rate. On the other hand, trusts can often be confusing and expensive to establish because they are complex legal structures. For this reason, they must also comply with extensive laws and regulations. And while income can be distributed at the discretion of the trustee, debts and losses cannot. Business trust vs sole trader Unlike with a trust, a sole trader business structure is simple and affordable to set up and operate. You also don’t have to register for a tax file number (TFN), and can enjoy full control of all assets and decisions as the sole owner of the business. However, you have unlimited liability and are fully liable for paying tax on all income earned. It’s also a lot harder to minimise tax as a sole trader —particularly if you’re a successful one. You could be paying a tax rate of up to 45% if you earn over $180,000 as a sole trader. Business trust vs partnership Similarly, a partnership is typically considered to be more cost-effective and straightforward to set up and operate than a trust. You also aren’t governed by the duties of the trust, and instead share the control, management and income with only one other person. However, the liability is much higher as it is only halved rather than shared by multiple trustees. There is also significantly less asset protection and tax advantages. Business trust vs company Like with a trust, a company is a separate legal entity, which means your personal assets are protected and you enjoy limited liability. You can also minimise your own income tax by keeping the profits within the company, as corporates tend to pay less tax than individuals. However, companies do not benefit from capital gains concessions. They are also – like trusts – complex and expensive to set up. In addition, they have a duty of care and diligence to the directors and the employees, ensuring they act in good faith and comply with an extensive range of laws and legislations. How to structure a trust While a trust is an extremely complex structure, the broad steps to creating one are relatively straightforward. Decide on the trust assets Select a trustee Determine the beneficiaries Have a trust deed drafted Have the trust deed settled by a settlor Sign the trust Pay any applicable stamp duty Create a name for your trust Apply for an ABN and TFN Set up a bank account The process itself is complex and complicated, and you should always consult a professional for legal and financial advice before pursuing this structure. Will your business benefit from a trust structure? There are significant advantages and disadvantages associated with a trust business structure. Whether they apply to you will depend on the size, purpose, and goals of your business. If you’re looking for a tax-efficient way to hold family assets and distribute inheritances, it’s a business structure you should explore further with a financial advisor. Want to give your business the best possible start right now? Sign up for Zeller – it’s everything you need to accept payments, manage your finances, and pay recipients fast, all in one box. Signing up is free and only takes a few minutes, no lengthy paperwork or visit to a bank branch required.

Choosing the right legal structure is a crucial part of running a business. The business structure you choose will affect your legal obligations, tax, asset protection, and reporting obligations. Regardless of whether you’re just starting out, or your business is growing, it’s important to understand the options. While this article can’t advise which structure is best for your unique circumstances, it does explain the most common types of Australian business structures and key features of each. A sole trader is an individual trading on their own. In a partnership, income, losses, and control are shared among partners. A company is a legal entity, separate from its owner(s). A trust is an entity that holds property for the benefit of others. An association is an entity usually established for recreational, cultural or charitable purposes. Keep reading to learn more about the types of legal structures new business owners usually consider – as well as how your obligations may differ, depending on the structure you choose. Types of business structures Sole trader Entrepreneurs who want to run their business all on their own are likely looking at a sole trader, or sole proprietorship, legal structure. A sole proprietorship is easy and inexpensive to set up. It’s also arguably the simplest type of business structure, because no one else is involved. Below are some of the key features of a sole proprietorship (or sole trader) business structure. Sole traders use their personal tax file number when lodging their income tax return. Income reporting is simple — there is no separate business tax return, all income is reported in the sole trader’s individual tax return. Throughout the year, sole traders typically put money aside for tax time using Pay As You Go. Sole traders will need to register for Goods and Services Tax (GST) if their annual GST turnover reaches $75,000 or more. A sole trader can employ staff. A sole proprietorship is an ideal business structure for business owners who want to be able to make all the decisions. However, it goes both ways. Sole traders also take on all accountability in the event of hardship or lawsuits. If the business goes into debt, a sole trader’s assets could be under threat. It’s also difficult to raise capital, if you’re planning on growing your business, and sole traders can't claim a deduction for drawing money from their business. Many new business owners start out with this structure, as it is relatively simple to change legal structures if you’re starting from a sole proprietorship. The same cannot be said for switching from another legal structure. Partnership A partnership is a legal structure under which two or more people operate a business, distributing income or losses between themselves. Instead of a single person making all the business decisions and taking on sole responsibility, control over the business is shared among at least two — and sometimes up to 20 — people. Naturally, that means the risk is typically shared also. A partnership may be an ideal option for business owners who are willing to relinquish some control in exchange for more widespread accountability. Similar to the risk a sole trader faces, if the business goes into debt each partner’s assets may be under threat. Below are some of the key features of a partnership business structure. A partnership doesn't pay income tax on the profit earned. Instead, each partner is required to report their share of income in their own individual tax return — and pay tax on their share. An ABN is required for all business dealings. A partnership is required to have its own Tax File Number, and all income and deductions must be reported in an annual partnership return — which is lodged with the ATO. As above, if the business’s annual GST turnover is $75,000 or more, it must be registered for GST. A partnership is not required to have a written partnership agreement in place, however it’s a good idea to prepare one for obvious reasons. A partnership agreement outlines how income and losses are each distributed amongst partners, and helps ensure all partners are on the same page from the outset. Company In a sole proprietorship or partnership, the business owners are part of the business. A company, on the other hand, is its own legal entity. This separation means that operating a company comes with less personal risk. A company exists as its own legal entity. Below are some of the key features of a company business structure. Companies must have a TFN. Companies pay tax at the company tax rate. As above, if the business’s annual GST turnover is $75,000 or more, it must be registered for GST. A company must pay Super Guarantee Contributions (SGC) for any eligible workers. This includes the director(s) of the company. A company is more expensive to register than a sole proprietorship or partnership, and the reporting requirements are also more complex. Whatever money the business makes belongs to the company, instead of going to the business owners. This reduces the liability of shareholders when it comes to debt and lawsuits, but it also increases the amount of startup paperwork and red tape. One consideration to keep in mind is that a business set up under a company structure is easier to sell or pass to someone else, as it’s set up as its own legal entity. Trust A trust, like a company, is a legal entity. The difference is that it is established to benefit people outside of the organisation as opposed to bringing in a profit for shareholders. Below are some of the key features of a trust. A trust must have its own TFN and ABN. As above, if the business’s annual GST turnover is $75,000 or more, the trust must be registered for GST. Whether or not a trust is required to pay tax depends on the wording of its deed, and whether income earned is distributed to the trust’s beneficiaries. The profits of a trust are divided among beneficiaries, who then pay tax on the money they make. Incorporated Association An association can be incorporated, or unincorporated. When an association is incorporated, it becomes a legal entity in and of itself — protecting its members from legal liabilities. Incorporation is a simple and inexpensive process, making it an ideal way to establish a legal entity through which small, community-based groups can provide a service. An incorporated association is intended to do good for a community — typically by providing a recreational, cultural or charitable service to people  — rather than make a profit for shareholders. All profits are put back into the association’s activities, rather than distributed to those involved in the business. Below are the key features of an incorporated association. An incorporated association will usually have members, a committee, a public officer, and a registered office. The association can accept gifts, bequests and grants, as well as buy land, take out loans and sign contracts. An incorporated association can sue, and be sued. Members and officers will generally be protected against personal responsibility for any debts or liabilities incurred by the association, although they could remain personally liable for outstanding fees. An approved constitution must be in place, outlining qualifications for membership, quorums for meetings, provisions for elections, and more. Any profits made by an incorporated association are not subject to tax. There are a number of qualifications that must be met before an association can become incorporated. However, the governing legislation differs in each state or territory. Further information regarding this type of business structure can be accessed via the relevant state bodies . Choosing the right structure for your business Choosing a legal structure requires business owners to consider how much power they want over the decision-making process, as well as how much accountability and responsibility they are willing to take on. When structuring a new business, or restructuring an existing business, it’s critical to understand the extent of your personal liability — as well as tax implications. Make sure to schedule a time to meet with your financial and legal advisors to discuss which legal structure best suits your particular circumstances. Here are some additional resources to help you choose your business structure. Business Registration Service | Help me decide The Australian Taxation Office | Choosing your business structure The Australian Taxation Office | Overview of legal structures Business Victoria | Business structures Small Business Development Corporation (WA) | Choosing your business structure Business Queensland | Business structures Fair Trading (NSW) | Business structures Business Tasmania | Choosing a business structure SA Business Information Hub | Business structures Northern Territory Government | Business structures Please note this article is for educational purposes only. It does not provide legal, accounting, or tax advice.