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Prior to starting up a business, you need to decide on the business structure that best suits your needs. Factors that may assist in this process include:

• the type of  business;
• establishment fees and maintenance costs;
• tax obligations; and
• the level of asset protection

The four main types of business structure commonly used by small businesses are:

Sole Trader

A sole trader is the most simple business structure consisting of an individual trading on their own and operating under their own name or with a registered business name. The sole trader controls and manages the business and is responsible for all debts and liabilities.

Sole traders are subjected to the same tax rates as individuals. However, you should be aware that as a sole trader, your assets are potentially more exposed to the risk of litigation.

Partnership

A partnership is formed when two or more people (up to 20) go into business together with a view to making a profit.  They may operate under their own names or with a register business name.  Limited partnerships involve passive investors who are not involved in managing the business.^[1]

A partnership is not a separate legal entity and doesn't pay income tax on the income earned by the partnership. Instead, each partner pays tax on their share of net partnership income.^[2] In a partnership liability is also unlimited (unless you are in a Limited Partnership) and extends to debts incurred by a partner without the knowledge or consent of the other partner.^[3]

Proprietary Limited Company

A Proprietary Limited (Pty. Ltd.) company is an independent legal entity able to do business in its own right.  The shareholders own the company and directors run the company. The directors of a company, as well as company employees, can be shareholders.

A company's operations are subject to the Corporations Act 2001, overseen by the Australian Securities and Investment Commission (ASIC). This Act simplified regulations to allow a company to have only one director and only one member.^[4]

There are costs associated with registering a company and the company tax rate is 30% on all profits. However, a company often offers a greater level of asset protection as opposed to some of the other business structures, as your personal assets are separate from the business.^[5] With this in mind, major creditors will often require directors to personally guarantee the company's liabilities.

Additionally, personal liability of directors and employees can also arise if they commit an offence under the Corporation Act 2001 or are found to have negligently performed their duties.^[6]

Trust

A trust is a business structure whereby the trustee holds property and earns and distributes income on behalf of the beneficiaries.  One of the most common types of trusts is a discretionary trust.^[7]

There are costs associated with registering a trust and for discretionary trusts, profits are distributed to the beneficiaries at the discretion of the trustees and can, therefore, be distributed in such a way to minimise tax, e.g. to beneficiaries in lower tax brackets. However, a trust often offers a greater level of asset protection as opposed to some of the other business structures if the trustee is a company that owns no assets. 

For further information on the different types of business structures, visit NSW Small Business and the Australian Tax Office (ATO).

For information on regulations and fees involved in establishing and running a company, visit the Australian Securities and Investment Commission (ASIC).

^{[1] NSW Small Business
[2] Australian Taxation Office
[3] NSW Small Business
[4] Ibid
[5] Ibid
[6] Ibid
[7] Ibid}