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As you embark on the journey of starting a business, deciding on the structure of your business is a crucial step. The business structure impacts reporting obligations, taxes, personal liability, and ongoing costs. While it’s possible to change your structure as the business grows, careful consideration during the initial setup can prevent unnecessary changes later. Therefore, it’s important to understand what each structure entails before committing to one that might not align with your vision for your business.
Determining the best business structure for your venture can be challenging. It requires an in-depth understanding of how each structure can affect your operations and a clear idea of how you intend to run your business and how you see it evolving. To help you navigate this decision, consider asking yourself the following questions:
The Western Australian Government has developed a tool to help you identify which business structure suits you best. You can try it here.
The “Sole Trader” structure is particularly suited for businesses owned and operated by the same person. In this structure, the business owner, manager, and operator is responsible for every aspect of the business. Even if you hire people, you can still be held responsible for day-to-day business decisions and operations, as well as all financial aspects of the business (debts and losses). The sole trader business structure is one of the easiest and cheapest to set up.
| Pros | Cons |
| Easy to set up and operate: Minimal legal and administrative requirements, making it quick and straightforward to start. | Unlimited liability: The owner is personally liable for all business debts and obligations, risking personal assets. |
| Full control: The owner has complete control over all business decisions and operations. | Limited funding options: Difficulties in raising capital since funding relies primarily on personal savings or loans. |
| Low setup and operational costs: Generally less expensive to establish and maintain compared to other business structures. | Tax implications: Business income is taxed at the personal income tax rate, which may be higher than corporate tax rates. |
| Simplified tax reporting: Only one tax return is required, combining personal and business income. | Limited growth potential: May face challenges in expanding the business due to reliance on one person’s capacity and resources. |
| Flexibility: Easier to make changes to the business without needing approval from others. | Lack of continuity: The business may cease to exist if the owner retires, becomes incapacitated, or passes away. |
| Privacy: Less public disclosure compared to corporations, maintaining greater privacy over financial affairs. | Skill limitations: The owner must manage all aspects of the business, which can be challenging without expertise in every area. |
The partnership business structure is particularly suited for businesses initiated by two or more people. Regulated by the Partnership Act 1895 in Western Australia, this structure implies an equal share of responsibilities between the partners. Decisions are made jointly unless otherwise specified in the partnership agreement, and each partner is personally liable for the business’s operations, debts, and obligations. In a partnership business structure, each partner reports their share of the partnership’s income or loss on their tax return.
There are multiple types of partnership business structures available:
| Pros | Cons |
| Shared Resources and Expertise: Partners can pool their skills, knowledge, and financial resources. | Joint Liability: Each partner is personally liable for the business debts, potentially putting personal assets at risk. |
| Simplicity: Easier and less costly to establish compared to a company. | Shared Control: Decisions must be agreed upon by all partners, which can lead to conflicts. |
| Flexibility: It can be easier to change the structure or management compared to a company. | Profit Sharing: Profits are shared among partners, which may lead to disputes if not clearly defined. |
| Tax Benefits: Potential for individual tax benefits since profits are distributed to partners and taxed at individual rates. | Continuity Issues: The partnership may dissolve if one partner leaves or passes away unless an agreement specifies otherwise. |
| Combined Effort: Partners can share the workload, reducing individual stress and responsibility. | Limited Life: The partnership has no separate legal existence and may dissolve on the departure or death of a partner. |
When opting for a company structure for your business, you are separating yourself from the business. The business now becomes a separate legal entity with the same rights as a natural person. With a company structure, you are not personally liable for the business’s operations, debts, and losses unless you are found to be in breach of your legal obligations. The company itself is responsible and can sue or be sued.
More complicated and expensive to set up compared to a sole trader structure, a company generally suits people who expect their business income to be highly variable and want the option to use losses to offset future profits.
There are multiple company structures to consider:
| Pros | Cons |
| Limited Liability: Protects the personal assets of shareholders. | Complex Setup and Maintenance: More complex and costly to establish and operate compared to other business structures. |
| Separate Legal Entity: Can enter into contracts, sue and be sued in its name. | Regulatory Compliance: Must comply with strict regulatory requirements, including financial reporting and audits. |
| Perpetual Succession: The company continues to operate regardless of changes in ownership. | Taxation: Subject to company tax rates, which may be higher than individual rates for small profits. |
| Capital Raising: Easier to raise capital through the sale of shares. | Disclosure Requirements: Must disclose financial information, which is accessible to the public (for public companies). |
| Credibility: Often viewed as more credible and established, which can enhance business opportunities. | Reduced Control: Decisions are made by the board of directors, which may limit the control of individual shareholders. |
A trust business structure is composed of trustees and beneficiaries (trust members). In this structure, the trustee manages the business on behalf of the trust’s members (or beneficiaries). A trustee can be an individual or a company and is responsible for all aspects of the trust, including income and losses. In a trust business structure, assets are generally protected from the creditors of the beneficiaries. This structure can also present tax advantages for beneficiaries if the income is distributed to those in lower tax brackets.
Although a trust structure offers multiple benefits such as asset protection, tax efficiency, and flexibility in income distribution, setting up a trust is complex and involves long administration processes and extensive regulatory compliance.
| Pros | Cons |
| Asset Protection: Assets held in a trust are protected from creditors. | Complex Setup and Administration: Establishing and maintaining a trust can be complex and costly. |
| Tax Benefits: Income can be distributed to beneficiaries in lower tax brackets, potentially reducing the overall tax burden. | Regulatory Compliance: Trusts are subject to regulatory and compliance requirements, which can be burdensome. |
| Flexibility: Discretionary trusts allow flexible distribution of income and capital. | Limited Control: Beneficiaries have limited control over the trust assets, depending on the type of trust. |
| Succession Planning: Trusts can facilitate smooth succession planning by clearly defining the distribution of assets. | Trustee Responsibilities: Trustees have significant legal and fiduciary responsibilities and must act in the best interests of the beneficiaries. |
| Continuity: Trusts can continue to operate even after the death of the trustee or beneficiaries. | Potential Tax Complexity: Trusts can involve complex tax issues, and professional advice is often necessary. |
Although the business structures introduced above are some of the most commonly used, other types of structures can also be implemented.
A Social Enterprise operates primarily to achieve social, cultural, or environmental goals rather than to maximise profit for shareholders. In Western Australia, social enterprises can take various legal forms, including not-for-profit, charities, or even for-profit companies with a strong social mission. They reinvest the majority of their profits into their mission, making them a valuable structure for entrepreneurs who prioritise social impact alongside business sustainability.
A cooperative is a member-owned business structure where individuals unite to meet common economic, social, and cultural needs through a jointly-owned enterprise. Co-operatives operate on principles of democratic member control, where each member has equal voting rights regardless of their shareholding. This structure is ideal for businesses that aim to serve the mutual interests of their members, such as agricultural co-ops, retail co-ops, and housing co-ops, promoting shared ownership and community focus.
| Sole Trader | Partnership | Company | Trust | |
| Legal Status | Not a separate legal entity | Not a separate legal entity | Separate legal entity | Separate legal entity (trustee holds assets) |
| Liability | Unlimited | Unlimited (shared amongst partners) | Limited liability (shareholders' liability limited) | Limited liability (trustee has legal responsibility) |
| Control | Full control | Shared control amongst partners | Control divided among directors and shareholders | Control by trustee. Beneficiaries have limited control |
| Taxation | Profits taxed as personal income | Profits are taxed as personal income for each partner | Company tax rates, dividends taxed at shareholders’ rates | Income is distributed and taxed at beneficiaries' rates |
| Set up & Costs | Simple and low-cost | Moderate setup complexity and costs | Complex and higher costs | Complex and higher costs |
| Funding | Limited to personal funds and loans | Pooled resources from partners | Easier to raise capital via shares | Can raise funds through investments in the trust |
| Reporting & Obligations | Minimal reporting requirements | Moderate reporting requirements | Strict reporting and compliance requirements | Regulatory compliance and detailed record-keeping |
| Continuity | Business ceases if the owner retires or passes away | Partnership dissolves if one partner leaves (unless agreed) | Perpetual succession; continues despite changes in ownership | Trust continues as per the trust deed, regardless of changes in trustee or beneficiaries |
| Profit distribution | All profits to the owner | Profits shared among partners | Profits distributed as dividends to shareholders | The trustee distributes income to beneficiaries |
| Business name protection | Limited protection | Limited protection | Better protection (registered at a national level) | Protection if structured as a company |
| Asset protection | Personal assets at risk | Personal assets of partners at risk | Shareholders’ personal assets are generally protected | Trust assets are generally protected from creditors |
Choosing a structure for your business can be a challenging task. Surrounding yourself with experts can guide you through this process and help you make a well-informed decision.
At Breathe Accounting, we are here to support you in making the right choice for your business to thrive. We provide you with tailored advice, offering detailed insights into the benefits and drawbacks of each business structure so you understand how each of them works and impacts your legal obligations, tax liabilities, and operational flexibility.
From selecting the right business structure to ensuring your finances are on track, we assist you in keeping your business on the path to success. We help you ensure your business is built on a solid foundation, and alleviate the burden of bookkeeping, accounting and taxes so you can focus on what you do best – running your business