Tax basics

Business structures

An important decision you need to make when starting a business is choosing the business structure that best suits your needs.

There are four main types of business structure commonly used by small business in Australia:

sole trader
partnership
trust, and
company.
The main features of these structures are described below.

More information
For more information about tax and small business:

phone 13 28 66, or
visit Operating a business essentials web page

Business tip
Your income in a company
If you use a company to operate your business it’s likely you’ll be an employee or a director of your own company. In that case, the company will need to withhold amounts from salary or wage payments it makes to you as an employee, and from any amounts it pays you as directors’ fees, under the PAYG withholding system.

Features of different business structures
Sole trader
A sole trader is an individual who is trading on their own.

That person controls and manages the business. The income of the business is treated as the person’s individual income, and they are solely responsible for any tax payable by the business.

A sole trader may apply for an ABN for their business and use this number for all their business dealings.

A sole trader uses their individual tax file number when they lodge their income tax return.

The income from a sole trader’s business activity is included along with any other income in their individual tax return.

Partnership
For tax purposes, a partnership is an association of persons or entities that carry on business as partners or receive income jointly (except a limited partnership, which is treated as a company).

Partners may apply for an ABN for the partnership and use this number for all the partnership’s business dealings.

A partnership needs its own tax file number. This can be applied for on the ABN application form. The partnership’s tax file number is used when it lodges its annual income tax return.

A partnership doesn’t pay income tax – each partner includes their share of the profit or loss in their individual tax return.

Trust
A trust is an obligation on a person to hold property for the benefit of others (who are known as ‘beneficiaries’).

The trust’s tax file number is used when the annual income tax return for the trust is lodged.

However, except in special circumstances it is the beneficiary, rather than the trustee, that is taxed. Usually the beneficiary has to include their share of the trust’s net income in their personal tax return (Form I). The trustee is liable to pay tax on income distributed to minor or non-resident beneficiaries, or on any income it accumulates.

The trustee needs to register for an ABN in its capacity as trustee of the trust. The trustee is taken to be an entity in that capacity.

Company
A company is a legal entity separate from its shareholders. For tax purposes, a company means a body or association, incorporated or unincorporated, but does not include a partnership or a non-entity venture.

A company needs to register for an ABN and for a tax file number.

Companies are regulated by the Australian Securities and Investments Commission.

A company pays income tax on its profits – the general rate of tax is 30%.

Tax basics <<<<<<