Choosing a Business Structure


Its important, before buying a business you should understand the structure of the business as it may affect its operation, taxes and legal obligations. There are many advantages and disadvantages to each type of business structure. In Australia any business that turnsover $75,000+ must be GST regeistered ($150,000 for non-profit organisations) and is required to record its income and expenses and submit a quaterly BAS statement which will require the business to pay or be refunded for tax spent / received. You must also register for GST if you provide taxi travel as part of your business, regardless of your GST turnover.

The type of business structure can affect personal assets and the tax obligations required. A change in ownership of an existing business you have purchased may require a new registration depending on what type of structure the business operates under. 

Most common types of business structures:

Sole Trader

This type of business has no seperate legal entity. As the owner of the business you are reponsible for the liablities of the business. You need to report your business income on your personal tax return along with other income. There are few legal and tax formalities in setting up this business and you have full control over its operation. Any profits of the business are yours. You are legally responsible for the business and the debts and losses are your sole responsiblity. It can sometimes be hard sourcing finance for a start up business, though purchasing an established business may be easier. You are responsible for your own super, it is not a legal obligation that you have to pay. 

Partnership

This is a business when two or more people start or purchase a business, they legally share the profits, liabilities and losses of the business. The percentage of this is outlined in a partnership agreement. You must lodge a seperate partnership tax return. They are usually inexpensive to set up and you have the benefit of 2 or more people to assist with the finances and work load. The downside is that any profits of the business are split between the owners as outlined in the agreement. 

Company

A company is a registered business that is a seperate entity to the owners, it has its own accounting and the owners hold shares in the company. There are different fee's and taxes for a company and the legal obligations are different to Sole Traders and Partnerships. A seperate Company Tax Rerurn is lodged. Companies usually have greater access to capital. Shareholders are not liable for debts of the business (though this appears to be changing in recent reports) and they tend to have a lot less say in how the business is run, compared to Sole Traders and Partnerships. 

Trust

This is when the business is transfered to a third party who has legal control and has a duty of care to run the business to benefit someone else. You must lodge a spereate trust income tax return. A big benefit of a trust is that is has perpetual existance and does not cease with the death of a beneficiary. Similar to a company a trust is more expensive and potentially complicated to establish. 

 

Find more information abouut the structure of businesses and your tax obligations please visit:

Choosing the Right Business Structure (ATO)

Australian Tax Office

Registration and Licenses (business.gov.au)

GST for small Business

 

Hopefully this information helps you in understanding the type of business structure when buying a business. If you need any more information please visit the above websites or send us an email and we can point you in the right direction!

 


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