One of the key decisions a business owner must make before commencing the business is the business's organisational structure. In Australia, there are many business structures an owner can choose from, including:
- Sole Trader
- Partnership
- Company
- Trust
When contemplating a business structure, opt for the one that aligns best with the business's specific needs. Thoroughly evaluate each option, considering key factors and applicable rules associated with each structure.
The chosen business structure can influence:
- Required licenses
- Tax obligations of the business
- Classification of the business as either an employee or owner
- Potential personal liability
- Degree of control owners exert over the business
- Ongoing costs and paperwork volume for the business
It's important to note that a business structure is not static and can evolve throughout its life. As the business undergoes growth and expansion, there may be a need to transition to a different type of business structure.
Below, we will examine these business structures' essential business and legal implications.
A sole trader is a self-employed person who owns and runs a business.
- It is the simplest and cheapest business structure.
- Sole traders have only one owner who controls and manages the business.
- The owner is legally responsible for all aspects of the business, including debts and losses. If someone sues the business, they are suing the sole trader, meaning all their assets are at risk.
- The owner can employ workers in their business. However, they can’t be an employee of their own business.
- The owner is responsible for paying super for any workers they employ. They may also contribute to a super fund for their retirement.
- Sole traders pay the same tax as individual taxpayers according to the marginal tax rates.
- Sole traders are responsible for their superannuation.
Sole Trader Business Structure Australia - Pros & Cons
Watch this short video to understand the advantages and disadvantages of being a sole trader.
To read more about a sole trader business structure. Check out the business.gov.au website
To read more about the key tax obligations of sole traders, click here.
A partnership is a business structure where two or more people own and control the business.
- A partnership is relatively inexpensive to set up and operate.
- All partners share income, losses and control of the business.
- The Partnership Act governs partnerships in each Australian State.
- A partnership agreement can help prevent misunderstandings and disputes about what each partner brings to the partnership and what they are entitled to receive from the business.
- The partners in a partnership cannot be employees of their own business.
- The partnership can employ workers in their business and is responsible for paying super for any workers they employ.
- Partners are responsible for their superannuation arrangements21
Other legislation that may be relevant to a partnership includes:
- Employment laws - Anyone employing or payrolling staff needs to understand and follow laws about employee rights such as wages, termination, safe work environments, awards, maternity leave and discrimination and harassment. Employment laws can be federal or state-based legislation. You should research the employment law relevant to your industry and ensure you are aware of when legislation changes. This can include wage changes under an award, superannuation guarantee increases and payroll tax limits. Fairwork Australia administers laws and regulations that govern Australian workplaces. Visit fairwork.gov.au for more information.
- Intellectual property - All businesses need to understand the correct procedures they need to take to safeguard their intellectual property. This includes trademarks, patents, or trade secrets.
- Privacy laws - A business must demonstrate they are doing everything possible to protect the personal information it obtains. Research the privacy laws relevant to your business to avoid breaching this legislation.22 Visit oaic.gov.au for more information.
- Workplace safety and health - The Commonwealth, states and territories are all responsible for regulating and enforcing workplace health and safety regulations (WHS). You must know the laws about protecting yourself and your employees from hazardous work environments because the fines for failing to comply with these laws are substantial. Hazardous work environments. For accountants and bookkeepers, this includes managing sedentary behaviour such as prolonged sitting, which poses significant health risks and managing mental health in the workplace. To learn more about WHS laws, visit the Safe Work Australia website.
Partnership Business Structure Australia – Pros & Cons
Watch this short video to understand the advantages and disadvantages of operating as a partnership.
To read more about a partnership business structure, visit the business.gov.au website.
To read more about the key tax obligations of partnerships, click here.
What is a Company?
A company is a business entity run by its directors and owned by its shareholders.
- Companies have higher setup and administration costs.
- While a company provides some asset protection, its directors can be legally liable for their actions and, in some cases, the company's debts. All company directors are required by law to verify their identity and get a director identification number. Click here for information on Director ID.
- Companies have additional reporting requirements.
- Therefore, companies often employ staff and are subject to employment and superannuation laws.
- Companies are regulated by the Australian Securities & Investments Commission (ASIC).23
Similar to the partnerships above, accountants and bookkeepers working for companies should be aware of:
- Employment laws
- Intellectual property laws
- Privacy laws
- Workplace safety and health laws.
- Company tax laws
- GST laws
- Superannuation laws
- FBT laws
Financial Reporting Requirements
Under the Corporations Act, public and private companies have the following financial reporting requirements:
| Structure | Financial Reporting Requirements | How these impact business operations in relation to financial accounting and management |
|---|---|---|
| Large proprietary company |
Large proprietary companies are considered a ‘disclosing entity’, and therefore, they must comply with the requirements for financial reporting assets in the Corporations Act, including:
|
This means accountants and other finance personnel responsible in large proprietary companies must adhere to the financial reporting requirements set in the Corporations Act, including what must be included in the financial reports, time frames for lodging these reports, and the relevant accounting standards and regulations for financial reporting. |
| Small proprietary company |
Generally, they are not required to prepare formal financial reports each year and lodge them with ASIC. However, they are required to prepare only if (a) it is directed to do so under sections 293 and 294 of the Corporations Act 2001 and (b) if a foreign company controlled it for all parts of the year and it and it is not consolidated for that period in financial statements for that year lodged with ASIC by:
|
This means that accountants and other relevant finance personnel. However, they are not required to produce annual reports for the company and must adhere to the requirements set in the Corporations Act 2011 when the conditions for financial reporting are met. |
| Public companies |
Public companies are considered a ‘disclosing entity’, and therefore, they must comply with the requirements for financial reporting assets in the Corporations Act, including:
|
This means accountants and other finance personnel responsible in public companies must adhere to the financial reporting requirements set in the Corporations Act, including what must be included in the financial reports, time frames for lodging these reports, and the relevant accounting standards and regulations for financial reporting. |
Company Business Structure Australia – Pros & Cons
Watch this short video to understand the advantages and disadvantages of operating a business as a company.
To read about a company's business structure, check out the business.gov.au website.
To read more about the key tax obligations of companies, click here.
Setting up a trust can be expensive as a formal deed is required outlining how the trust will operate
- A trustee is legally responsible for the operation of the trust.
- There are formal yearly administrative tasks for the trustee of the trust
- The trustee can be an individual or a company.
- Profits from the trust go to beneficiaries.24
Trust Business Structure Australia - Pros & Cons
Watch this short video to understand the advantages and disadvantages of operating a business as a trust.
To read more about a trust business structure, check out the business.gov.au website.
To read more about the key tax obligations of trusts, click here.
The ATO defines a non-profit organisation as an organisation that is not operating for the profit or gain of its members, whether these gains would have been direct or indirect. This applies both while the organisation is operating and when it winds up.
Any profit made by the organisation goes back into the operation of the organisation to carry out its purposes and is not distributed to any of its members.25
Not-for-profit
The Australian Charities and Not-for-profits Commission (ACNC) regulates not-for-profit organisations. Not-for-profit organisations and charities must keep financial records that correctly record and explain their transactions and financial position. These records must also allow the entity to prepare true and fair financial statements. They must also keep operational records that explain their activities. Charities and not-for-profit entities operating overseas have specific record-keeping requirements for their overseas activities and the resources sent overseas.
Charities
Charities and not-for-profit entities have different obligations for record-keeping, which you need to be aware of if you work as a bookkeeper or accountant for a not-for-profit organisation. The record-keeping obligations depend on the charity’s size, complexity, activities, how it spends or receives money, and whether it has extra obligations from state regulators.
Read this article from ACNC to learn more about Record Keeping Obligations for Charities.
Contracted bookkeepers and accountants perform tasks agreed to with their clients. Clients may be sole traders, partnerships, companies, trusts, charities or not-for-profit organisations. Contracted bookkeepers and accountants must comply with the requirements of tax laws, including the Tax Agent Services Act 2009. Employed bookkeepers are salaried employees of an organisation. Although they are not legally required to have a formal qualification, employers today would expect a bookkeeper to have a bookkeeping qualification.
When working as a bookkeeper or accountant in private practice or as an employee, decision-making can be complicated around legislation, regulations and guidelines. This is due to a decision's serious impact on the client if made incorrectly. An important part of the decision-making process is incorporating policies and procedures.
Policies act as a guideline for decisions made in a business. They ensure that day-to-day tasks meet the business's legislation requirements.
Procedures describe how to perform day to day tasks. They align with a business's policies.
As a business evolves and legislation changes, policies and procedures need to be updated, and the changes must be communicated to all staff. This can support, moderate and help ensure a sound and consistent decision-making process is undertaken.
The decision-making process should incorporate the following steps:
- Gather information
- Analyse information
- Follow policies and procedures
- Research legal requirements
- Apply legal requirements
- Apply any relevant knowledge
- Communicate decisions to clients
When you are making a decision, it is important to conduct yourself with integrity. This is key to your client trusting you and trusting your decision.
Integrity is one of the fundamental values businesses seek in the employees they hire, contractors they engage with, and businesses they partner with. It is the hallmark of a person who demonstrates sound moral and ethical principles at work.
Honesty and trust are central to integrity. Acting with honour and truthfulness are also basic tenets of a person with integrity.26 People with integrity are trustworthy and reliable and can be counted on at all times, even when they are not being watched. It is these qualities that draw people toward someone with integrity.
Seeking advice and guidance
There can be many different options when it comes to advice on financial services. Your most immediate option when seeking advice is to go to colleagues, managers and supervisors. In many cases, these can be the most suitable options as they are inexpensive, and the advice comes from a trusted source such as your managers. Other options may include seeking advice from in-house lawyers or advisors who are professionals in the field and who work exclusively with your company.
In many cases, it is wise to seek advice from professionals specific to the field in which you need advice.
Many law firms operate within a field of expertise. These could include:
Commercial law, also known as business law, applies to the rights, relations, and conduct of persons and businesses engaged in commerce, merchandising, trade, and sales.27
Corporate law (also "company" or "corporations" law) is the study of how shareholders, directors, employees, creditors, and other stakeholders such as consumers, the community and the environment interact with one another.28
Industrial relations/employment law is the body of law that governs the employer-employee relationship, including individual employment contracts, the application of tort and contract doctrines, and a large group of statutory regulations on issues such as the right to organise and negotiate collective bargaining agreements, protection from discrimination.29
Litigation is the process of taking a case through court. The litigation or legal process is most common in civil lawsuits. In litigation, there is a plaintiff (one who brings the charge) and a defendant (one against whom the charge is brought).30
Property law is the area of law that governs the various forms of ownership and tenancy in real property (land as distinct from personal or movable possessions) and in personal property within the common law legal system.31
Tax law is an area of legal study dealing with the statutory, regulatory, constitutional, and common-law rules that constitute the law applicable to taxation, which is the method by which the government levies on economic transactions.32
Situations where seeking advice is important
Seeking advice is crucial for effective decision-making in today’s complex business environment. Financial professionals face numerous challenges where expert guidance can enhance decision quality, mitigate risks, and ensure compliance. Consulting knowledgeable colleagues, specialised advisors, and legal experts allows businesses to make informed decisions, optimise performance, and achieve sustainable growth. This proactive approach is essential for thriving in a competitive market.
Some situations where seeking advice and guidance is essential for evaluating and moderating decision-making processes include:
1. Complex Financial Transactions
Involvement in complex financial transactions often requires expert advice to navigate the intricacies and implications involved. Some scenarios include:
Mergers and Acquisitions (M&A):
- Valuation and Due Diligence: Expert financial advisors can help assess the financial health, assets, and liabilities of the target company to ensure a fair valuation and mitigate risks.
- Integration Planning: Post-merger integration is crucial for realising synergies. Advisors can provide insights into merging operations, aligning cultures, and effectively consolidating resources.
- Risk Assessment: When making significant investments, such as purchasing real estate or investing in new technologies, expert advice is necessary to evaluate the potential risks and returns.
- Financing Options: Financial advisors can also provide guidance on the best financing options available for large investments, including loans, equity financing, or alternative funding sources.
2. Tax Planning and Compliance
Navigating the complexities of tax laws is a critical area where consulting tax professionals can significantly benefit businesses:
- Complex Tax Regulations: Tax laws are intricate and subject to frequent changes. Tax professionals help businesses understand the implications of these laws and ensure compliance with reporting requirements.
- Optimising Tax Strategies: Advisors can assist in developing tax-efficient strategies to minimise tax liabilities. This includes identifying eligible deductions, credits, and tax incentives that the business may qualify for.
- Avoiding Penalties: Non-compliance can result in hefty fines and penalties. Seeking advice from tax professionals ensures that businesses meet their obligations and avoid costly mistakes.
3. Regulatory Changes
New regulations or amendments to existing laws can have far-reaching impacts on business operations. Seeking guidance in these situations is vital:
- Staying Informed: Regulatory bodies frequently update laws that govern business practices. Legal experts can help businesses stay informed about these changes and understand how they affect their operations.
- Compliance Framework: When new regulations are enacted, businesses may need to adapt their compliance frameworks. Legal advisors can assist in developing policies and procedures to align with new regulatory requirements.
4. Strategic Planning
Long-term strategic decisions require careful consideration and often benefit from expert guidance:
- Business Expansion: When contemplating entering new markets or expanding operations, seeking advice is essential to assess feasibility, competition, and market demand. Market researchers and business consultants can provide valuable insights.
- Long-Term Vision: Strategic planning involves setting long-term goals and objectives. Advisors can facilitate the development of a strategic plan that aligns with the company’s vision and helps navigate the path to achieving those goals.
By recognising these situations where seeking advice is necessary, businesses can make informed decisions, mitigate risks, and enhance their overall operational effectiveness. This proactive approach not only supports compliance but also positions the business for long-term success.
Business.gov.au
Business.gov.au puts the needs of businesses first. It’s a single entry point for the Australian business community to access information from all three levels of government.
The website helps make it easier for you to find information. They collate information and resources from the government into one website to reduce the number of websites you need to visit.
The business.gov.au website has been online for over 20 years and is regularly updated to meet the needs of businesses. It is the Australian Government’s primary website for the business community.
The website is for everyone in the Australian business community, including start-ups, small and medium businesses, family enterprises and business advisers.
Their vision is that business.gov.au is your first port of call when you have questions about starting, running or growing a business in Australia.33
Some of the resources companies can access
- guides to help start a business
- information about planning and marketing a business
- Employment
- News articles
- Grant opportunities
- Workshops and events, with training courses, webinars and workshops
Peta has employed you to help set up a new business, Peta’s Pies.
Peta is unsure if she should be a sole trader or a company. To assist her in making a decision, she has asked you to research and prepare a report that explains the difference between the two business structures.
Using the attached Business Structure Template, develop a report for Peta. In the report, provide information on any associated costs.
Once you have completed this task, check your answers using the sample answer below.
LEARNING CHECKPOINT ANSWER
Business Structure Template - Sample Answer
