Structures Part 1, Sole Traders & Partnerships

This is part one of a three part mini-series on structuring a business in Australia.

When carrying on a business, there are generally four structures that can be chosen:

An Individual (Sole Trader)
A Partnership
A Company
A Trust

This part will cover individuals and partnerships, part two companies and trusts and part three will consider combinations of these structures.

While the usual requirements when carrying on a business are constant, each of these structure have different characteristics and taxation treatment. It can be costly to change business structures, so it is worth getting the structure right from the start.

Individual (Sole Trader)

An individual carrying on a business in their own name can also be called a sole trader. From a legal and taxation perspective, the individual and the business are the same. An individual has unlimited liability, which is to say that assets of an individual can be at risk if the business fails, even if they are not used in running the business.

An individual can employ staff, but cannot share the ownership of the business with anyone without using one of the structures listed below.

Taxation of Sole Traders

Individuals pay tax at ‘marginal rates’ that increase as their assessable income increases. The top rate of tax is currently 47% (plus 2% Medicare levy).

When business carried on by an individual makes a loss, there are certain rules that may restrict those losses from being used to reduce that individuals other income (known as non-commercial loss rules).

More information on the current tax rates for individuals is available from the Australian Taxation Office (“ATO”).

Partnership

For tax purposes, a partnership is defined as an association of people who carry on a business as partners or receive income jointly. Partners in a partnership can either be individuals, companies or trusts.

Each of the partners are jointly and severally liable for the actions of the partnership. This means that each of the partners can be responsible for all of the liabilities of the partnership, so other assets owned by a partner can be put at risk if the partnership fails.

A partnership agreement will contain the terms of the partnership, including how profits and losses of the partnership are to be shared amongst the partners.

If the partnership wishes to add a new partner, the original partnership is dissolved and partnership is formed. The ATO has administrative provisions to allow the new partnership to assume the old partnership’s registration details.

Taxation of Partnerships

From a tax perspective, the profit or loss of the partnership is distributed to the partners at the end of each year in accordance with the partnership agreement. Partners of the partnership then pay tax (or deal with the income) at their tax rate.

An individual partner cannot draw salary or wages from a partnership, however a partnership agreement may make provisions for a working partner to receive a different share of partnership profits than other non-working partners in the partnership.

Information provided above is a summary only and should not be considered advice. For professional advice on structuring or restructuring your business, please contact us on 1300 884 797.