Business Structures for Subcontractors

One of the first decisions you’ll need to make as a subcontractor is which business structure you will use.

Most subbies operate as sole traders, at least to begin with.  Whether or not this is the best option for you really depends on your own specific needs as well as your future plans.

It’s important to get your business structure right as it can have an impact on the way that you pay tax and super, and there are also asset protection issued which need to be considered.

Structures Available

There are four main structures available to businesses in Australia, these are as follows:

  • Sole Trader
  • Partnership
  • Company
  • Trust

The most common business structure for a subbie is that of a sole trader, however the other structures are also worth considering.

We have detailed each of the main structures below, along with the pros and cons of each.

Sole Trader

This is the most straightforward of all the business structures.

As a sole trader you and your business are a single entity.  This means you only submit one tax return for you and your business.

A sole trader can operate under his or her own name, or they can choose to register a business name to trade under.

One of the main downsides to being a sole trader is that you and your business are a single legal entity.  This means that if your business gets sued or suffers a loss, you are personally liable for the amount.

Pros

  • Simple structure
  • Cheap to establish
  • Single tax return for both personal and business

Cons

  • Increased personal exposure if things go wrong
  • Lack of asset protection

Company

Incorporating as a company is a more complex and costly process than being a sole trader, but there are a number of benefits to going down this path.

One of the main benefits to a company is that it is a separate legal entity.  This means that if your company gets sued or cannot pay its debts, those amounts are locked in the business and will not affect you personally.

There is one exception to the above rule however, and that is where you have breached a relevant law, such as trading while insolvent.  In this case you can be found personally liable for your company’s debts.

You can generally tell the difference between a business name and a company by the ‘Pty Ltd’ on the end of the name.

Pros

  • Increased personal asset protection
  • Potential tax benefits / flexibility

Cons

  • Increased setup costs
  • Extra set of tax returns each year

Partnership

We won’t go too far into partnerships, as these tend to be less common for subcontractors.  You can read more about partnerships by following the link.

Trust

Some subbies choose to run their business via a family trust.

We won’t go into too much detail on trusts, as this is a subject better discussed with your accountant.

A family trust structure will still involve a Pty Ltd company, but by using a trust there is the potential for even greater levels of asset protection for you and your family.

More Information

For more information on which business structure you should use as a subcontractor, you best option is to speak with your accountant.

You can also find plenty of information online.  A great source is the ATO website which has a number of guides including one titled choosing the right business structure.

Another good article is one titled becoming a subcontractor which can be found on the Trade Risk website.