Every business begins with big dreams and elevated aspirations of success, but so few ever dream about the complicated process of registering and legitimising their business with the Australian government. One of the most important choices every ecommerce entrepreneur needs to talk about with their accountant is what type of business structure they should choose.
The business structure you choose can affect nearly every aspect of your business, from the licenses you require and the taxes you pay to your potential personal liability and the level of control you have over the business. While it is not unheard of to change your business’s structure as it goes, it is still crucial to carefully choose what you begin with.
Make sure to consult your ecommerce accountant about your options, but as a baseline, it might also help you to continue reading this guide to make a better choice for your business.
1. The Sole Trader
This is the simplest form of business structure, and it is considered the easiest and most inexpensive to set up. As a sole trader, you will be legally and financially responsible for all aspects of your business. Outside of managing the day-to-day decisions, you will also be saddled with all the business’s debts and losses should it incur any.
This requires fewer decisions, fewer reporting requirements, and allows you to use your Tax File Number (TFN) to lodge tax returns. It does not require a separate business account at your bank, but this is nevertheless recommended. However, you will need to keep track of your financial records for at least five years in the event that any issue or dispute arises from finances.
A partnership is made of two or more persons, among which the income or losses are distributed. There are three types of partnerships, as follows:
The General Partnership (GP) is a setup where all partners are equally responsible for the management of the business, with each person bearing unlimited liability for its finances.
The Limited Partnership (LP) is made up of general partners whose ownership and share of profits and losses are divided according to their financial contributions at the founding of the business. A limited partner can play as much of a part as they want to in the business’s operation, from being a silent partner to a fellow manager.
Incorporated Limited Partnerships (ILP) is a type of structure where partners have limited liability for the business’s debts. That being said, there must be at least one general partner with unlimited liability who will be personally liable for shortfalls.
This structure requires all partners to have separate TFNs, in addition to the business being registered for an Australian Business Number (ABN) for all business dealings. A yearly partnership tax return must also be lodged with the Australian Tax Office (ATO). For turnovers of $75,000 or more, the business must be registered for Goods and Services Tax (GST).
3. The Company
A company is a legal entity with the same rights as a natural person, which means it can incur debt and be sued. Members of a company are not liable for its debts unless breaches in its legal obligations are made. The caveat here is that they are expensive and complicated to set up.
Companies are also controlled by directors and owned by shareholders, with only limited liability in the event of financial shortfalls. Like a partnership, yearly tax reports must be filed with the ATO, and the $75,000 profit must also be registered for GST.
The process of running a company is more complicated and requires the help of many professionals to ensure compliance with local regulations.
A trust is an obligation imposed on a person, known as the trustee, to hold property or assets (business assets included) for the beneficiaries of the trust. Trust structures are expensive to set up and operate, and they require formal trust deeds that outline specifically how they operate. The trustee will also need to undertake administrative tasks on a yearly basis.
In a trust, the trustee is legally responsible for its operations. The trustee, in this case, can also be a company.
It is important to consider what business structure you feel you are capable of handling, as each has its own level of complexity when it comes to handling and management. They also have varying levels of financial protection, which is also an important concern. Whatever choice you make, make sure it is the right one for you.
If you need the help of an ecommerce accountant to help set up your business, send us a message at The ECommerce Accountant. We have the expertise it takes to help make running a business much easier, no matter how new it is.