How to Set Up Your Business in Australia

Having the right business structure in place is important as it can affect:

• How much tax you pay;

• Your responsibilities as a business owner;

• Your potential  personal liability;

• Your asset protection;

• Ongoing reporting requirements and costs

Business Structures

An outline of the various types of business structures are detailed below.

• Sole trader

This is the simplest and most popular form of business structures, where all revenue and expenses are taken up by the one-person operating the business.  

Under a sole trader structure there is no legal separation between the owner and their business which means that the owner is responsible for all the liabilities of the business and their personal assets are not protected from creditors or in the event of family break-ups.

From a tax perspective, the net income of the business is included with any other income of the owner and taxed at the marginal rate of tax. If the net income of the business is low (which it could be in the initial years) then so would be the marginal tax paid, where-as if the combined income is high then a higher marginal rate will apply (which could be up to 47% (including medicare)  for those earning more than $180,000 in the 2024 year, or $190,000 in the 2025 year).   

• Partnerships

A partnership is a structure where two or more people operate a business together, with each partner sharing profits and losses in a proportion set out in an agreement.  

Under a partnership structure the business is not a separate legal entity  from the partners so the business partners are personally liable for the debts of the business and partners can be liable for debts another partner has incurred  on behalf of the partnership.

From a tax perspective, the partnership doesn't pay income tax on the income it has earned; instead the net income of the partnership is split between the partners, in a proportion set-out in the partnership agreement, so that each partner would then pay tax on their share of the net partnership income that is distributed to them.

• Trusts

A trust involves a trustee running a business on behalf of its members (called beneficiaries) with net income distributed according to rules in the trust deed.

There are various types of trusts. Under a discretionary trust the trustee has discretion in distributing funds to beneficiaries, while in a unit trust the distribution is determined by the number of units held by each beneficiary in the trust.

From a tax perspective, a key advantage is the ability to decide who would best benefit from the distribution of profits, for example family businesses are often operated through a trust with the ability to distribute profits to family members (as beneficiaries) on lower tax rates without the beneficiary being involved in running the business. Care must be taken, however, as potential tax avoidance issues arise where a beneficiary in a low tax bracket does not actually benefit from the distribution; the benefit is instead diverted to another family member that would otherwise pay a higher rate of tax if it was directly distributed to them. In this case the ATO may disregard the beneficiary’s entitlement to the trust distribution. Consequently, the net income whcih whould have been assessed to the beneficiary, may be assessed in the trustee's hands at the highest marginal tax rate.

• Company

A company is a business structure owned by shareholders, but operated by directors; in many cases (especially small businesses) company directors are also shareholders

The reason why people choose a company to operate their business is that their liability is limited to the amount that they have invested in the company (as share capital). Creditors generally can't attack personal assets of the shareholders (unless shareholders have pledged personal assets as guarantees against company debts).  

From a tax perspective, the tax rate for companies with annual revenue less than $50M, where 80% or less of the assessable income of the company is passive income (such as dividends, royalties and rent, interest, a net capital gain) is 25% and 30% otherwise; which is significantly lower than the top marginal rate for either individuals or trusts (currently at 45%). Company profits are distributed to shareholders from after-tax profits as dividends. These dividends may a carry franking credit, which consists of the tax already paid by the company. The shareholder is required to pay tax at the marginal rate on all income received, including dividends and any attached franking credit. The shareholder will be entilted to a tax offset equal to the amount of the franking credit.

Registrations & legal requirements

When setting up a new business there are a number of registrations required with the ATO, such as:

• Application for a Tax File Number (TFN), and

• Registering for an Australian Business Number (ABN)

Furthermore, if a business earns more than $75,000 in gross annual revenue it is required to register for Goods & Services Tax (GST) with the ATO.

If the business is to be operated under a company structure, a new company is to be set-up and registered with the Australian Investments & Securities Commission (ASIC), who require details such as:

• Names and addresses of the director and company secretary

• Shares to be issued, the share types and its shareholders

• Address of the company's registered office and address of the principal place of business

• The postal address for all correspondence that is to be sent to the company

New businesses need to prepare and address a number of legal requirements, depending on the type of business structure that is to be set-up, such as:

• A partnership agreement (if it is to be operated as a partnership)

• A trust deed, including beneficiaries (if it is to be operated as a trust)

• A constitution, formal notices, consents and minutes (if it is to be operated as a company),

All of the above registrations can be complex and must be done correctly to ensure the business is set-up up correctly.

H&R Block can assist with providing advice on the right structure for your business, including tax strategies and planning, and set-up the appropriate structure for you to include all legal and documentation and registrations required by the Regulators.