Choosing a Business Structure for Your Online Business
Starting an online business can feel quick. You can have a website up and a first sale through in a week. The legal structure behind it deserves a bit more thought than that.
In Australia the four common structures are sole trader, partnership, company and trust. Each one changes who owns the business, who pays the tax and how much paperwork you take on. Here is a plain guide to how they differ.
Why the structure matters
Your structure decides how the business is taxed and who carries its debts. It also affects the registrations you need and the yearly returns you lodge. Some structures are cheap and simple to set up, while others take expert help. Picking one early saves you from untangling things later.
The Australian Taxation Office warns that changing structure is not free. It says there may be costs, tax implications and other obligations to meet if you change. That is a good reason to think about where the business could be in a few years, not just next month.
Sole trader
ASIC describes a sole trader as the simplest business structure. One person owns the business and makes the decisions. It is straightforward to set up and has fewer compliance and legal obligations than the other structures. Many people selling online on their own start here.
The tax side is simple too. The ATO says there is no separate business tax return for sole traders. Business income and expenses go in your individual return, using your own tax file number. You are entitled to an ABN and use it for all your business activities.
The catch is personal responsibility. The ATO says a sole trader is legally responsible for all aspects of the business, including debts and losses. There is no separate entity standing between the business and your own assets. If the business takes on risk, so do you.
Super works differently as well. A sole trader must pay super guarantee for any workers but does not have to pay it for themselves. You can still make personal contributions. If retirement savings are on your mind, our article on managed funds versus investment property looks at other options business owners weigh up.
Partnership
A partnership is two or more people who do business together. ASIC says they own the business and make decisions together. It is more complex to set up than a sole trader business, but simpler than a company. Two friends launching an online store together often fit this model.
The ATO says a partnership has its own tax file number and must apply for an ABN. It lodges an annual partnership return showing all business income and deductions. The return also shows how income or losses are split between the partners. The partnership itself does not pay tax on that income.
Instead, each partner reports their share and is personally liable for any tax due on it. Partners also look after their own super. A written partnership agreement is not required, but the ATO notes it can help. Setting out who does what and how profits are shared avoids arguments later.
Company
ASIC says a company is a separate legal entity from the people who own and run it. It is owned by members, also called shareholders. Officeholders such as directors make the key decisions. The liability of a company is limited.
Limited liability is the main draw, but it is not a free pass. The ATO says a company gives some asset protection, yet its directors can be liable for their actions. Directors can also be liable for certain tax and super debts under the director penalty rules. Taking on the director role means taking on real duties.
A company also carries more upkeep. ASIC says every company must be on the companies register, keep its details up to date and pay an annual fee. The ATO says it needs its own tax file number and must lodge an annual company tax return. It pays tax at the company tax rate and must pay super for eligible workers, including directors.
When a company has more than one owner, the owners need a clear way to deal with each other. A shareholders agreement sets out how decisions are made and what happens if someone wants out. It is worth sorting before money starts coming in.
Trust
ASIC says a trust holds property or assets for the benefit of others, known as beneficiaries. The trustee is responsible for all aspects of its operation. A trustee can be a person or a company. If a company acts as trustee, that company must be on the companies register.
ASIC is clear that trusts are complex and expensive to set up and need expert knowledge. The ATO says a trust must have its own tax file number and apply for an ABN. It lodges an annual trust tax return with a statement of how income was distributed. Generally the beneficiaries pay tax on the income distributed to them.
There are limits worth knowing. The trustee pays tax on any income that is not distributed. Trust losses cannot be passed out to beneficiaries, though the trust may carry them forward. You can read the ATO summary of business structures and their tax obligations for the detail on each one.
Questions to ask before you choose
There is no single right answer for every online business. A few questions help narrow it down. Talk them through with an accountant or lawyer before you register anything.
- Will you run the business alone or with others?
- How much personal risk are you comfortable carrying?
- How much time and money can you put into yearly compliance?
- Do you plan to hire staff or bring in investors later?
- Could you need to change structure as the business grows?
The ASIC overview of the sole trader, partnership, company and trust structures is a good starting point for those conversations. It also explains when each structure needs a registered business name. Once you have chosen, the ABN, the name and the domain all follow from that decision.
After the structure is settled
With the structure in place, the practical setup can begin. Our guide to starting a carpet cleaning business walks through the early steps for one kind of service business. The same order of decisions suits most new ventures, online or not. Get the legal base right, then build on it.
For an online business, the next big piece is the website itself. Our notes on best practice for website design are a good next read. Your site should show the correct business details for the structure you choose. That keeps things clear for customers from the first visit.
Frequently asked questions
What is the simplest business structure?
ASIC describes the sole trader structure as the simplest. It is straightforward to set up and has fewer compliance and legal obligations. You report business income in your individual tax return.
Does a company protect my personal assets?
A company has limited liability and gives some asset protection. Directors can still be liable for their actions. They can also be liable for certain tax and super debts under the director penalty rules.
Does a partnership pay its own tax?
No. The partnership lodges a return, but each partner pays tax on their own share of the income. Partners are also responsible for their own super.
Can I change my business structure later?
Yes, but it is not always simple. The ATO says there may be costs, tax implications and other obligations when you change. Getting advice before you start can save that trouble.
This article is general information for Australia only and is not legal, tax or financial advice. Rules change over time, and some related licences and duties differ between states and territories. Speak with a qualified lawyer or accountant about your own situation.
