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Vi Nguyen, CA (ANZ), CPA (USA)
Getting the right structure for your business can save you thousands and prevent major headaches.
What is a business structure and why do I need one when running a business?
A business structure determines who’s responsible for your business. It’s kind of abstract in some ways, but let’s relate it to the activities of creating a song.
Solo Creation: Let’s say you make up a song while singing in the shower – that unique song was created by you. The structure is that you own it and your song is yours.
Partnership: Let’s now say you and your friend decide to write a song together – that’s a partnership.
Company Ownership: Let’s now say you entered a singing competition and got noticed by a record company. They hire you to create a song and sign a contract saying that they have the rights to the song. That song isn’t ‘yours’ to sell even though you’re the author – a different ‘body’ owns it, a company.
A company is interesting because it can be sued and do most things that a real-life person can do, but it ‘exists’ without a body. You might have seen this structure with Taylor Swift in the news. While Taylor Swift is the author of her songs, the rights to her music were owned by a company. This company sold it and then she bought it back from that company.
Trust Ownership: Let’s now say a family hires you to create a song for them and they have a family trust. The trust owns it, but a trust is different from a company – it’s not a separate legal ‘body’ by itself. Instead, it’s a legal relationship where one party (the trustee) holds and manages assets for the benefit of others (the beneficiaries). It’s like having someone hold something valuable for you according to specific rules. That’s even more abstract than a company.
Do I Need a Structure if I’m Just Selling Stuff?
If I just start selling stuff, isn’t that doing business? Why would I need a structure? It can be, or it can just be a hobby. If the intention is to make money through enterprise, then it’s likely to be a business. The next question is: why do I need a structure if I’m already doing business by selling stuff?
Here’s the thing: You are already in a business structure by default, and that’s as a sole proprietorship (aka sole trader). Remember the ‘singing in the shower’ situation? So the business structure of a sole trader is just a person doing business. Simple as that!
So you can just be in a default business structure?
Sometimes, yes! And it can also sometimes be a trap.
Take the example of making music with your friend. Let’s say you both don’t like paperwork and you spend time with your friend making a song together. You then find out through a friend of a friend that your friend posted the song on TikTok and claimed it to be hers only! And now she’s sold ‘her’ song for a few thousand. You want a part of that sale and claim that you actually had a partnership. Is that possible?
It can be, because it’s happened before!
Here’s a real life example:
Take the example of the bestselling novel in the early 2010s – ‘Fifty Shades of Grey’. As reported in major media outlets, it started with two women who became friends online. When the novel became a bestseller, a legal dispute arose over profit sharing. While they didn’t have a partnership agreement in writing, based on their actions, the court found they were in a partnership – even though one was in Texas and the other in Australia!
This is why formalizing your business structure is important – to avoid nasty surprises down the track.
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The 4 Common Types of Business Structures
- Sole Trader / Sole Proprietorship – The owner of the business is the person, in flesh. This means that if the person passes, so too does the business. It also means that the business and the person aren’t seen as being separate. This means if something happens in the business and you get sued, everything you own – your house, your car – is on the line.
- Partnership – This is a very interesting structure. You can have partnerships with individuals, but partnerships can also involve companies alongside individuals. In a general partnership, the partners share business equally, but there are different types of partnerships and agreements that can modify how partnerships are run. You can have very large partnerships like your big 4 accounting firms, and smaller partnerships. It’s more about doing business as an ‘arrangement’ of two or more parties being cooperative.
- Company – A company is often seen with “Pty Ltd” at the end of the name (which stands for Proprietary Limited) and it’s seen as its own ‘person’. Here are some common myths/questions around companies: Q: What’s the difference between a Pty Ltd and a partnership? The partnership is an arrangement to do business with one or more entities, including individuals and companies. So a company can be part of a partnership, but a company also exists on its own. A partnership can’t! Q: Who’s the owner? Is the CEO the owner? The owner of a company is its shareholder/s. If the CEO is the shareholder, then yes, the CEO would be an owner because they are the shareholder. But, CEO is a separate function and an officer of the company. The CEO isn’t always the owner. Q: Is a Pty Ltd company a body corporate? If you’re talking about a body corporate/owners corporation referring to owners of a unit block – no, a Pty Ltd is not a body corporate in that sense. A Pty Ltd is a company registered with ASIC and governed by the Corporations Act. While a body corporate (owners corporation) is a corporate entity created when a strata plan is registered and governed by strata legislation. While they’re both corporate entities, a Pty Ltd is not a body corporate in that sense.
- Trust – this gets more abstract. Remember how partnerships are arrangements between entities? A trust is also a legal relationship, but different – it’s where someone (the trustee) holds and manages assets for the benefit of others (the beneficiaries). A trust can run a business and own assets, but they’re held on trust for the beneficiaries’ benefit. It doesn’t have ‘owners’ like a company has shareholders. It’s a bit weird but it exists as a legal relationship. There are many benefits of a trust, but they can be complex.
Why Choose a Company Structure? What is a Pty Ltd company business structure, in more detail?
1. Asset Protection
One of the biggest benefits is asset protection. Let’s say you make cookies as a side hustle and had a bad batch that resulted in food poisoning. If you ended up being fined and don’t have enough money in your business to pay the penalties, it could be possible that whoever is seeking compensation could look at your personal assets, e.g., your house. So it’s worth getting a company structure if you have personal belongings worth protecting.
2. Tax Rates
Base rate entities that are companies have a tax rate of 25% as of 2026. If you’re a sole trader earning $250,000 a year in your business (and assuming no other deductions etc…), you’re likely to be taxed at the highest individual tax rate of 45% for each $1 over $190,000 in 2026 (so all up around $78,638 – and that doesn’t even include the Medicare levy, which is an additional amount!). However, if your business is run through a company, the tax is likely to be around $62,500. This results in a tax saving of $16,138. The dollars make it worth it!
3. Risk Management
Many building developers use separate companies for each development project to minimize risk. Let’s say one project goes broke or faces council issues – these happen! The troubles of one company don’t affect the other projects. It’s like having separate bank accounts instead of one joint account – if one account has problems, your other money stays safe. This protects the overall business and personal assets.
4. Investment Purposes
Some people might also establish companies for investment purposes – to invest in shares or do a large project together.
Getting the right structure for your business can save your serious money.
Let’s look at two small business scenarios involving business structure.
Scenario 1 – The Electrician
You’re an electrician and experience a huge boom in your business – you’ve even hired an apprentice! You started out doing electrical work for friends and neighbors, and it grew from there. You didn’t bother registering for anything other than an ABN and your license. This year, you made $360,000 taxable income. Awesome! But you need to pay tax, right?
At 2026 tax rates, this is around $128,138 paid in tax as a sole trader. You don’t bother changing your structure. You’re happy as anything.
But wouldn’t you be happier if you had an extra $38,138? This is the approximate amount you would save if you had been a company (base rate) with the lower tax rate.
Scenario 2 – The Dentist
Let’s say you’re a dentist working for a practice, but you’re paid by one practice and service their clients. You decide to set up your company expecting to take advantage of the lower tax bracket. Unfortunately, because of personal services income tax rules, your income will be attributed to you as an individual… so unfortunately, you don’t get the savings from the lower tax rate.
In this scenario, you’re down around $600 each year from company registration and renewal fees and around $1,500 from accounting fees. But you didn’t get the tax savings that you were hoping for!
This is why getting the structure right for your situation is important – it can save you money and make life much easier. There are considerations about other applications of tax rules that affect which structure would be suitable for you.
It’s Not Just Structure – Registrations Matter Too!
Laws can change! For example, you only needed to register for GST if your projected income was going to be $75,000 or more in a year.
But there are exceptions – ride-share drivers should note this!
If you provide taxi, limousine or ride-sourcing services, you must register for goods and services tax (GST) regardless of your turnover. You must collect and pay the GST and income tax on all your rides and all other business income. (Source: ATO)
I’ve gotten my business set up, what’s next?
Great work! That’s one part done. Now let’s turn to the record-keeping part of a business.
When you’re doing your business activities, you’re going to have to record what’s happening because it’s legally required. You’ll need somewhere suitable to do this. A good way to do your record keeping is through dedicated accounting software.
With Useful Money Stuff Accounting’s setup service, they will set your nominated software up to suit your proposed business.
They can help make appropriate suggestions to suit your budget, including free software options. For example, if you’re earning $1,000 every 2 months, they’re not going to suggest accounting software like Xero which is $70 a month! Or an enterprise-level accounting software that’s not easily usable.
Useful Money Stuff Accounting doesn’t typically suggest using Excel or a spreadsheet to do your accounting record keeping as it doesn’t have the standard built in functionality for general bookkeeping functions such as bank reconciliations etc…
After you have made a selection, they then set up your accounting software. What does this involve?
It involves creating invoice templates, modifying a chart of accounts to suit your business, and providing a general advice sheet on how to record the main transactions in your business for your sales.
This means that you’re ready to go!