Sole Trader, Partnership or Company - Business Structure

Sole Trader, Partnership or Company – Which Business Structure Will You Choose?

When you’re starting your own business, there are a lot of things to learn and a lot of decisions to make. Many of those decisions will be regarding your business and how to set up your business structure. The decisions you make now will have legal and financial implications, so it is best that you consider the commercial law benefits of each business structure.

Here are the three most common business structures in Australia:

1. Sole trader

A sole trader is a person who runs a business. A sole trader legally and financially responsible for all facets of the business. It is quick, easy and cheap to start a business as a sole trader. All you need is an ABN to get started. It is recommended that you also get a separate bank account and perhaps a trading name, but these are not compulsory.

Sole traders are taxed as individuals. So your tax depends on your income in the same way that it would if you had a regular wage-paying job. Of course, there are other factors involved when you claim income and deductions relating to your business.

You can still employ people as a sole trader, and you have full legal control over the business.

2. Partnership

When two or more individuals or parties form a business together, this is considered a separate business structure and is classified as a partnership.

The business is not a separate legal entity to the individuals involved in the partnership. As such, each partner is responsible for the legal and financial facets of the business.

You can consider a partnership as having similar implications to a sole trader business, with similar requirements for paperwork and set up.

It is recommended that anyone who is considering a partnership should set up a partnership agreement. While this might be an additional cost, it is an invaluable document to have in the case of potential disputes.

3. Company

If a business is run by a company, the company is a separate legal entity to the individuals who run the business. This means that financial and legal implications are different from a company for the people who manage or own the company.

You must register your company. Companies must abide by the rules set out in the Corporations Act 2001, and they are regulated by ASIC to ensure that they are abiding by commercial law.

While this kind of business structure reduces your risk as the owner, a company is more expensive to set up and to maintain, with more paperwork and other administration to complete.

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