Starting your own business is both exciting and daunting, understanding different modes of operating your business can alleviate stress and help you make better decisions for your new business. This article introduces the two of the four main types of business structures. Knowing what your rights and obligations are as a small business owner will help you to be better prepared for what will come with starting your business. In the next article, we will discuss Companies and Trusts.
As a sole trader, you have full ownership and control over your business. You are subject to less requirements but on the flip side you cannot raise funds through selling shares to investors. The business will not be viewed as a separate legal person to the sole trader. As a sole trader you can use your individual tax file number to file tax returns, but you also need to obtain an Australian business number (ABN). You can also register a business name with the Australian Securities and Investments Commission (ASIC). As a sole trader you do not have limited liability and is personally liable for debts the business incurs, this opens you up for risk if the business makes a loss or is sued by others. All revenue and loss from the business will be personally attributed to you and affect your income tax obligations.
While record-keeping and reporting duties are less onerous for sole traders, you are required to keep financial records including tax returns for 5 years and report certain changes to government departments. While you cannot employ yourself, you can employ others to work for you and must comply with obligations such as workers’ compensation insurance and superannuation contributions.
A partnership is when two or more people carry out a business together with a view to share both management and income derived from the business. A Partnership is formed by a partnership agreement. Partners share control, income, losses, and liability of the business, but can attribute them in the partnership agreement. Each partner pays income tax based on their share of the partnership income and a partnership tax return must be lodged with the Australian Tax Office. Each partner has to arrange their own superannuation. Partnerships must also register for GST if turnover is $75,000 or more in a financial year. There are 3 main types of partnerships – General Partnership, Limited Partnership, and Incorporated Limited Partnership.
As the name suggests, limited and incorporated limited partnerships may have limited liability for its partners, but at least one partner must have full liability – the general partner. An incorporated limited partnership is a separate legal entity that has legal personhood and sue and be sued in its own name.
In general, each partner is an agent for the partnership. The ability to limit liability for any debt of the partnership or limit responsibility to yourself for things done by other partners are dependent on which partnership is being operated. The partnership structure can be fragile as any partner can dissolve the partnership by notice, unless it is an Incorporated Limited Partnership. Consequently, picking the right partnership model for you and your partners is essential.
If you have any queries on the legal and tax obligations on you when operating your business, simply contact Straits Lawyers at firstname.lastname@example.org or give us a call on 8410 9069.
Please note that this article does not constitute legal advice and Straits Lawyers will not be legally responsible for any actions you take based on this article.