How to Structure Your New Business Before Registering for an ABN

By

Riarne Gale

|

Feb 23, 2023
< Back to Blog

Wondering how to register an ABN in Australia? Read this before you do and ensure you structure your new business with maximum benefits for tax and risk management.

Looking to register a new business?

Congratulations! You’ve probably been working on an idea for some time, perhaps you’ve already developed a product or service, and now you’re ready to get started.

While registering for an ABN mercifully takes less than an hour and can be done online, how you structure your business – ie: as a sole trader, a company, partnership or trust – has real implications for your tax obligations, potential tax benefits, and your ability to easily make changes in the future.

You can change your business structure down the track, but it can be expensive and time consuming, so it’s best to get it right before you register for an ABN. We’ve outlined the top five considerations to help guide your thinking and research.

The five main considerations when structuring a new business:

  1. What are the tax implications?
  2. Is asset protection a priority?
  3. Will you be working alone, or will the business have multiple owners?
  4. Do you need to split the income?
  5. Does the regulation in your industry affect the structures you can use?

A chartered accountant or lawyer can provide you tailored advice that’s right for your situation and your business goals, and while the expense may not be in your startup budget, it could save you thousands in fees later.

Types of business structures in Australia

Need a head start on how to start your business in Australia? Firstly, head to the Australian Taxation Office’s How to Start a Business and the Business.gov.au portal provide excellent resources.

Sole trader

If you are the only person operating in the business, then you are a sole trader. This means you have full control but you are also personally liable and will be taxed at your personal marginal tax rate. A drawback of being a sole trader is that you only have your own resources (e.g. intellectual, financial) which can be restrictive to long term growth.

Partnership

A partnership is when two or more people operate as a business and share the income. Partnerships are established in a partnership agreement, which outlines all key information including the rights and responsibilities of the partners. The partnership agreement also dictates profit distributions, which get taxed at each partner’s personal marginal tax rate.

Partnerships offer limited protection for partners’ personal assets as partners are jointly liable for all partnership debts. With more people in the business, you can also access collective knowledge and funding from a larger network. However, as a partner you do not have full control of decision making, all partners must agree.

Company:

A company is a distinct legal entity, separate from its owners (shareholders) and decision-makers (directors). The most common types of companies are:

  • Proprietary Limited Companies  – Cannot raise money from the general public through share issues)
  • Public Companies – They are usually formed to raise or borrow money by listing the company’s shares for trading on a stock exchange

There is limited liability for company owners, as the company is its own legal entity and can borrow and trade as itself. This means the company is liable for its own debts and responsibility is split between the shareholders and directors. For small companies, people can be both directors and shareholders.

Company profits are currently taxed at 30%. Companies are more expensive to establish and administer, but they can offer protection for personal assets and can be easier to manage a change of ownership in the future for a company.

Trust

A trust is the most complex of all business structures. It is a relationship between the trustee who is appointed to manage the finances of the trust on behalf of the beneficiaries. Unlike a company, a trust is not a separate entity. Trusts offer the most protection for owners as well as the most flexibility in distribution of profits. It is established in a legal document called the Trust Deed. Everything is set out in the trust deed including who the beneficiaries are and what they’re entitled to.

Assets and liabilities are held by the beneficiaries and are not actually owned by the trust. Profits are allocated to the beneficiaries and taxed at the beneficiary’s personal tax rate.

Business StructuresSole TraderPartnershipCompanyTrustIs the structure difficult to set up?NoNoYesYesIs it expensive to register?NoNoYesYesDo I retain complete control?YesNoNoNoAre there complex reporting requirements?NoNoYesYesWill my assets (house etc.) be under threat if my business goes into debt?YesYesNot as likelyNot as likelyDo I receive full profits made from the business?YesNoNoNoCan I employ staff?YesYesYesYesDo I have to pay myself superannuation, workers comp etc.?NoNoYes (If employed by the company)Yes (If employed by the company)Can I change the legal structure easily?YesNoNoNoDo I have the ability to plan tax through avenues like income splitting?NoYesYesYesIs it easy to raise capital?NoYesYesYesIs it easy to dissolve or exit?YesYesYesNo

Want more info on how to structure a new business?

Watch our free webinar where we unpack the 2021 Federal Budget for Small Businesses and explore how to structure your business in detail. Chartered Accountants and Business Advisors, Ash Rad and Nav Lal from Netsurplus provide plenty of practical tips you can apply right now.

Asset Protection

Once you decide on how to structure your new business, it is important to protect your assets.

Asset protection is any planning carried out to reduce potential creditors’ ability to access your business assets or value. The way you operate can not only expose your business but it can expose your personal wealth and your home because of the transactions and how they are structured. All types of businesses will carry some form of risk. So it’s important to control the risk in the business structure you choose.

Risks arise from dealing with:

  • Customers
  • Suppliers
  • Employees

The five principles of asset protection are:

  1. Separate risk from your assets – Make sure any personal assets are not linked to the business
  2. Choose a risk taker and an asset holder – The risk taker will be the director of trading entities while the asset holder controls the wealth generating entities. This will help secure the money within your business.
  3. Separate risks from business assets – You also want to make sure business assets are separated from risk as much as possible. For example, you could give any at risk individuals access to assets in the business without legally owning them.
  4. Make sure each distinct business venture operates from separate entities – This will minimise risk by keeping it separate to each entity
  5. Regularly move funds from the risk side to the wealth side – This ensures the trading entity has minimal assets.

If you want more growth strategies, subscribe to our mailing list to get insights, industry analysis and be notified of any upcoming webinars.