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Types of Business Entities in Australia

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Setting up a firm in Australia makes you liable for meeting local business regulations and complying with laws and tax obligations within scopes of a chosen legal entity. Australia supports a vast variety of legal business formats (entities) which enable an entrepreneur to choose a set of benefits that are crucial for their particular business situation: from a flexibility and limited liability to a prestigious image to saving on taxes.

General Features of Incorporating in AU

Regardless of the chosen legal entity, all businesses incorporated down under are managed by the ASIC (Australia Security and Investment Commission) in accordance with the Corporations Act passed in 2001. Registration is handled by the Australian Business Registrar. Every business entity has its unique risks, costs, tax modes, and liabilities. A foreign entrepreneur who wishes to spread their overseas business to Australia without messing with registering it as a local company can get registered as a foreign one; however, this doesn’t free their business from compliance with Australian laws and paying taxes in some cases.

The procedure of setting up a firm down under is fast and easy, and takes a couple of days provided that the prior basic paperwork is done. Registration of a new business with the Australian Business Registrar doesn’t require forming a big paid-up capital: a couple of Australian dollars is enough for a start.

Incorporating in Australia, you can choose among these the most popular legal entities: a proprietary “limited” company, public company, sole trading, trust, and partnership. In this guide, we will overview all of them pointing to their most crucial setup features, key benefits and drawbacks.

Company

A proprietary company with a limited liability is a legal business format that dramatically decreases risks of doing business due to a fully independent legal entity (separated from company’s founders and members) and liability limited by a share capital. In Australia, an entrepreneur can set up a company (being its only director and its only shareholder at the same time) and benefit from acting in the company’s name separately from their own name. Another form of the company – a public company – is allowed raise funds from a general public by selling shares on a stock exchange.

Benefits of Australian Company

  • Independent legal entity allows a company to buy property, incur debts and receive loans in its own name.
  • A limited liability protects in case of troubles (debts, legal issues, and so on): a company will be liable to creditors and before the law in limits of its share capital, and members risk nothing but their shares (unless you issued “unpaid” shares).
  • An ownership isn’t tied to certain members and can be easily transferred to any other party through the selling of the shares. The same share system facilitates involving new owners either through the selling of the shares or through issuing new ones.
  • A company is a steady formation that can operate indefinitely until its liquidation. Changes in membership and ownership (such as retirement, death, or selling the shares) don’t impact the company’s existence.
  • A company has wider capital and investment opportunities because an investor is more likely to funnel funds (through buying shares) into an entity that would protect their personal assets from liability in case of troubles. In such “limitedness”, a huge benefit (which a company has in comparison with other entities) hides. For example, in a partnership, an investor becomes a “silent partner” and becomes fully liable for entity’s debts or other difficulties.
  • The company’s status facilitates dealing with bankers, suppliers, investors, and clients because they see such entity as a steady and serious business formation. The same image factor gives a company access to a wider skill base.
  • The Australian company can trade all across the country and benefit from free-trade and double-taxation agreements with many countries of the world.
  • Beneficial taxation: from July 2015, small companies (whose annual turnovers don’t exceed 2 million AUD) enjoy a lower corporate tax rate – 28.5% instead of 30%. Not-for-profit companies have a tax-free threshold of 416 AUD. The rate is 55% for profits between 416 AUD and 863 AUD and 28.5% for higher incomes.

Drawbacks of Australian Company

  • A company’s limited liability will work only if its owner doesn’t give any personal guarantees in case of debts (this way their personal assets are being exposed to liability) and they run the company responsibly and honestly showing no negligence in incurring debts. Otherwise, the company won’t be protected from claims of creditors.
  • A company is quite costly to set up. You choose between registering a business name (the price will depend on the registration’s duration – 1 year or 3 years) and the company registration which will cost you up to 1500 AUD (the price will depend on the provider of incorporation services). Registering your business as a company (Pty Ltd), you acquire an image of a serious undertaking that will pay you back each time you deal with clients and partners. Maintaining a company, as well as winding it up, will also cost you more in comparison with other entities.
  • A company’s income (including capital gains and dividends) is taxed at the rate of 30% in Australia. A tax-free threshold doesn’t apply.
  • A company has lots of reporting obligations. All business documentation must be maintained for 5 years. The tax return must be submitted before June 30 (a new financial year starts July 1 in Australia).
  • Your intra-company affairs can be made public.

Requirements for Setting up Australian Company

  • A founder must suggest a business name that doesn’t violate the intellectual property rights of any third party. After the registration, a new company gets a 9-digit Australian Company Number that, along with the company’s name, must be reflected in all business documents.
  • Australia sets a very low minimum for the paid-up capital. You need as little as 2 Australian dollars to set up a company here.
  • Australian company must be run by at least one local director who is a real and at least 18-year-old person residing in Australia. As long as the local director is appointed, the company can appoint foreign directors.
  • A newly-established company must get a secretary appointed. If it doesn’t, one of its directors must perform the duties of a secretary.
  • A company must appoint a public officer who is responsible for paying taxes and dealing with the country’s tax office.

Sole Trading

This simple and quite cheap business format fits Individuals who wish to trade legally on their own. It is a perfect choice for small riskless businesses with modest capital investment. Setting up a sole trading, a businessman shares the same legal entity with their business which simplifies making decisions and conducting business operations, but, on the other hand, makes a businessman fully liable for all of their business’ actions, employees, losses, and debts.

Benefits of Australian Sole Trading

  • The business belongs only to you and you get all the profits. You use your personal Tax File Number for submitting your firm’s tax return.
  • Sole trading firms are cheap to set up.
  • This legal entity gives the maximum of privacy.
  • You can hire employees, but remember about obligations such hire entails: paying superannuation contributions and maintaining compensation insurance for each of your employees.
  • It is possible to upgrade your firm to another legal entity later (under general conditions).
  • Managing business is simpler with the sole trading format, and the procedure of winding up is easy.

Drawbacks of Australian Sole Trading

  • Your liability is unlimited, and you are fully responsible for your business mistakes with all you have. The law sees no difference between your firm’s assets and your personal ones. That is why this legal form doesn’t suit undertakings associated with risks.
  • You are limited in raising funds.
  • It can be hard to attract and retain highly talented employees as you cannot give solid guarantees concerning your business’ growth and durability.
  • Your business cannot live longer than you.
  • Your business gets taxed as a person, not as a corporate body. The income tax rate isn’t fixed but increases (from 19% to 45%) as you income increases.

Requirements for Setting up Australian Sole Trading

  • Your sole trading business isn’t required to have a business name if you, as a trader, act in your own name.
  • After the registration, you can apply for getting the Australian Business Number which can be used for dealing with clients, suppliers, and other partners. If you have this number, a withholding tax (46.5%) won’t apply to payments made to you by your business clients.
  • Unlike a company, a sole trading doesn’t require a separate bank account. You can use your personal one, but take care of keeping accounts for no less than 5 years.
  • If your business’ annual turnover exceeds 75k AUD, you need to get registered for paying the Goods and Services Tax.
  • You need to pay tax instalments quarterly using the pay-as-you-go system according to the expected amount of income. If you make a significant contribution to your business from your personal funds, you can claim for deductions unless this contribution was derived from business. For example, your wages won’t work because they are treated not as wages but as your business income for tax purposes.

Partnership

A form of a partnership fits businesses that unite a small group of people (no more than 20) who work together and distribute the common revenues between themselves. A partnership agreement must specify how exactly a revenue or a loss must be distributed. You can make valuable employees your partners. The format of a partnership is perfect for undertakings for which a limited liability isn’t crucial. There is also a form of a limited partnership that can have one of more (but not all) limited partner(s) whose liability is limited to the portion of their investment(s).

Benefits of Australian Partnership

  • You can unite with other entrepreneurship talents for doing your mutual business.
  • The entity of partnership is easy and cheap to set up.
  • A partnership can hire employees, but bear in mind implications of such hire: you need to pay wages, the pay-as-you-go and superannuation taxes, maintain worker’s insurance, and so on.
  • You get access to more capital and can borrow more through your other partners.
  • Unlike with a company, you can keep affairs of your partnership private, and a minimum interference from outside applies.
  • It is possible to upgrade your firm to another legal entity later (under general conditions).
  • A partnership’s income isn’t taxed as a company’s one, but each partner pays a tax for their share of the revenue they earned altogether.

Drawbacks of Australian Partnership

  • Partners’ personal assets aren’t protected by the limited liability. In case of debts, each partner is jointly and severally responsible before the law not only for their own share of the debt but also for the entire debt.
  • Sooner or later, partners can become enemies, and the risk of frictions is always present.
  • As a partner, you are liable for what other partners do.
  • Each time a partner leaves or joins the partnership, you need to make a full assessment of your partnership’s assets, and this procedure can be quite expensive.
  • For a partnership, it is harder to involve investments because investors prefer not to mess with businesses without a limited liability.

Requirements for Setting up Australian Partnership

  • There is no need to give your partnership a separate business name if all of you trade under your own names.
  • Before registration, a partnership agreement specifying roles, measures of liability, and authorities of all partners must be written.
  • After the registration, you can apply for getting the Australian Business Number which you can use for dealing with clients, suppliers, and other partners. If you have this number, a withholding tax (46.5%) won’t apply to payments made to you by your business clients.
  • If your business’ annual turnover exceeds 75k AUD, you need to get registered for paying the Goods and Services Tax.
  • A partnership operates under its own Tax File Number and is obliged to submit tax returns that reflect revenues and deductions.
  • In the entity of partnership, claiming deductions for funds derived from the partnership is impossible. Profits you get as your wages aren’t considered wages for the tax purposes.

Trust

A trust is a business formation whose profit is given to beneficiaries. The trust implies a trustee (either an individual or a company) who manages trust’s assets, does business and distributes profits in the favour of beneficiaries according to the written document called the trust deed. The trustee is liable for their actions before the law.

Benefits of Australian Trust

  • A trustee can have a limited liability if they are a corporate body that provides such limited liability.
  • Unlike a company, a trust provides a better privacy.
  • Trust’s revenue is taxed the same as the revenue of an individual.
  • Thanks to the trust deed, distribution of income can be specified very accurately.
  • A trust can hire employees, but keep in mind all implications of such hire: paying wages and making pay-as-you-go instalments, superannuation tax, and so on.

Drawbacks of Australian Trust

  • Trust setup is an expensive procedure, and its management can be quite complex.
  • A trustee isn’t allowed to act in disagreement with the trust deed.
  • For a trust, borrowing money can be a quite challenging procedure.

Requirements for Australian Trust

  • You need to get the business name registered only if you are going to act under a name different from your own.
  • A trust deed specifying the trusty’s responsibilities, administration, and powers of the trust must be written.
  • A trust uses its own Tax File Number for submitting tax returns. A report must contain the amount of profit, all business deductions, and distributions made to beneficiaries.
  • The trust acts under its own ABN and undergoes registration for paying the Goods and Services Tax if the trust’s annual income is higher than 75k AUD (150k AUD for non-for-profit organizations).
  • The trust’s beneficiaries are obliged to pay pay-as-you-go instalments for the benefits (distributions) they get from the trust. If entire trust’s revenue is given to adult Australian beneficiaries, the trust pays no tax for this revenue. If the beneficiary is a non-resident or an underage person, the trustee is obliged to pay income tax on their behalf and then the amount of this tax will be deducted from the beneficiary’s tax return.

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