When starting a small business, it’s essential to find the business structure that best suits your needs. The four business structures commonly utilized by small businesses in Australia are sole trader, partnership, trust and company. The structure you select may affect things like the tax you are liable to pay for, any asset protection, ongoing business costs, and dealing together with your clients. As an example, some choose to deal only with companies. Whichever structure you select, make sure you understand the responsibilities that go with this structure. Typically, costs and complexity increase as you move from a sole trader to a partnership to a company or a trust. If you’re not sure which structure to decide on, you should speak with a specialist, such as for instance an accountant, a tax adviser, or a solicitor.
A sole trader is the simplest business structure. The structure is inexpensive to set up because there are few legal and tax formalities. JASON operates his landscaping business as a sole trader, he trades by himself and controls and manages the business. The business enterprise income is treated as JASON’s individual income and he’s solely in charge of any tax the company must pay. Which means, after claiming a reduction for all allowable expenses, he includes all his business income with any other income and reports it on his individual tax return. JASON must certainly be registered for GST if his business turnover exceeds the GST registration threshold.
For tax purposes, a partnership is an association of individuals who carry on a small business as partners or receive income jointly. A partnership is relatively inexpensive to set up and operate. GREG and FIONA operate their website business as a partnership. It takes a unique tax file number when lodging its annual Partnership tax return. GREG and FIONA applied for an ABN for the partnership and use it for all the partnership’s business dealings.
A partnership is not really a separate legal entity and doesn’t pay income tax on the income it earns. Instead, GREG and FIONA pay tax on their share of the internet partnership income they each receive. While the partnership doesn’t pay tax, it will need to lodge an annual partnership tax return showing all income the partnership earned and deductions it claimed for expenses it incurred in carrying on the partnership business. The tax return also shows each partner’s share of the internet partnership income. A company is a complex business structure, with set-up and administrative costs which are usually higher than for other business structures. MARY runs her business as a company and the money the company earns is one of the company. The business will need to have a separate bank account. Companies need to lodge an annual company tax return, which shows the company’s income, deductions and income tax it’s liable to pay.
Companies also usually pay PAYG installments, which are credited against the sum total annual income tax it’s liable to pay. To learn more about business structures and responsibilities visit ato.gov.au forward slash getting started.