Starting a business can be nerve-racking. There is a great deal of things to take care of to ensure that you are setting up the business correctly now (which many change in the future) and for tax purposes. Aside from the budget, many worry about lodging the correct tax return and paying the correct amount owed. Below are the four business classifications to help you determine which one is right for you.
- Sole Trader — This is similar to a contractor. It is an individual who is the only person legally responsible for the business. It’s the cheapest way to start a company, and you can employ people. However, it is the riskiest since you are solely liable if the company fails and your assets can be seized to pay a debt. It’s important to note that a business owner is not an employee of the business, in which payment is derived differently than the payment derived for employees.
- Partnerships — A partnership forms when two parties strike an agreement to run a company as co-owners. Each party can consist of up to 20 people. A partnership is not a separate entity like a sole trader. The co-owners are liable for the debts of the business. Each partner is responsible for his or her own superannuation arrangements, since neither is an employee of the partnership. There are two types of partnerships in Australia: general and limited. There are more types in other countries. For example, in the United States, there are four types of partnerships: general, limited, limited liability and limited liability limited. Also, the partnership doesn’t pay income tax on the income earned, unlike a company.
- Company — It is a separate entity without shareholders. There are distinct tax differences between a sole trader and a company. Sole traders are taxed as an individual, and the person must report his or her business income tax in his or her individual tax return. The amount depends on the person’s income for that year and the deductions made. Companies, however, are taxed as a separate entity. The company’s income is reported in a company tax return. The director must know the current company tax rate percentage. Directors also need to report any income earned from the company and need to lodge a fringe benefit tax return if any fringe benefits were received.
- Trust — Like a charity, it is an entity that is property or income for the benefit of others. It requires a trustee, who is responsible for the trust’s operation. A trust deed is required, which states how the trust will operate. If a business is operated as a trust, the trustee is responsible for the company’s operations. Also, a trust can be a business, which provides some asset protection.