Business Structures in Australia- Sole Traders and Partnerships.

Deciding on the structure of your new business is one of the most important decisions you will need to make. Careful consideration of your circumstances and goals will need to be made to determine the optimal structure for your business. This blog will cover the basics of sole traders and partnerships as well as their basic pros and cons, however, it is not exhaustive, and it is recommended to contact an accounting or legal professional to ensure the best outcome is reached.

Sole Trader:

This business structure is the most simple and easy to operate. A sole trader operates from an ABN under themselves as an individual. This structure is ideal for low-risk and low value businesses.

  • Pros:

  • Simple to set up and manage.

  • Little to no compliance expenses or complexities.

  • Cons:

  • The individual operating a sole trader is liable for all debts incurred and the structure provides no asset protection (i.e. valuable assets such as a house can be at risk).

  • The profit of the business is also taxed at the individual’s tax rate (up to 49%). If the individual has other income (i.e. from a 9 to 5 job), or the profits of the business are high, then the tax liability for this business can be much higher than in other structures.

  • The business is limited to the natural life of the sole trader.

Partnership:

A partnership is like a sole trader, however, is made up of more than one individual. A partnership operates from its own ABN, however it is not a separate legal entity. A partnership tax return is needed to be prepared, and the share of the partnership profit is recorded in the partner’s individual tax returns.

  • Pros:

  • Less formal/complex than a company or trust to set up and manage.

  • Pooling of resources between partners, which can make the business more competitive.

  • Cons:

  • Partners can be jointly liable for liabilities incurred by the business, even if the debt was incurred by one of the other partners on behalf of the business.

  • Profit is taxed at the partner’s individual tax rate. There are also limitations on how profit can be allocated between the partners, especially if there isn’t a partnership agreement in place.

  • Partnerships are governed by state-based legislation. There may be legal complexities depending on where your partnership is based and conducts business.

Disclaimer

This information is not to be relied upon without speaking to your accountant, tax agent or financial adviser depending on the advice

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