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Choosing your business structure: Tax basics for small business

Choosing your business structure: Tax basics for small business


When starting a business, it’s very important
to choose the business structure that best suits your needs. The four business structures commonly used
by small businesses in Australia are sole trader, partnership, trust and company. The structure you choose may affect things
like the tax you are liable to pay, any asset protection, ongoing business costs, and dealing
with your clients. For example, some prefer to deal only with companies. Whichever structure you choose, make sure
you understand the responsibilities that go with that structure. Typically, costs and
complexity increase as you move from a sole trader to a partnership to a company or a
trust. If you’re not sure which structure to choose,
you should talk to an expert, such as an accountant, a tax adviser, or a solicitor. A sole trader is the simplest business structure.
The structure is inexpensive to set up because there are few legal and tax formalities. JASON
operates his landscaping business as a sole trader, he trades on his own and controls
and manages the business. The business income is treated as JASON’s
individual income and he is solely responsible for any tax the business must pay. This means that, after claiming a deduction
for all allowable expenses, he includes all his business income with any other income
and reports it on his individual tax return. JASON must be registered for GST if his business
turnover exceeds the GST registration threshold. For tax purposes, a partnership is an association
of people who carry on a business as partners or receive income jointly. A partnership is
relatively inexpensive to set up and operate. GREG and FIONA operate their website business
as a partnership. It needs its own tax file number when lodging its annual Partnership
tax return. GREG and FIONA applied for an ABN for the
partnership and use it for all the partnership’s business dealings. A partnership is not a separate legal entity
and doesn’t pay income tax on the income it earns. Instead, GREG and FIONA pay tax on
their share of the net partnership income they each receive. While the partnership doesn’t pay tax, it
does have to lodge an annual partnership tax return to show all income the partnership
earned and deductions it claimed for expenses it incurred in carrying on the partnership
business. The tax return also shows each partner’s share of the net partnership income. A company is a complex business structure,
with set-up and administrative costs that are usually higher than for other business
structures. MARY runs her business as a company and the
money the business earns belongs to the company. The company must have a separate bank account. Companies have to lodge an annual company
tax return, which shows the company’s income, deductions and income tax it is liable to
pay. Companies also usually pay PAYG instalments,
which are credited against the total annual income tax it is liable to pay. For more information about business structures
and responsibilities visit ato.gov.au forward slash getting started.

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