The words “business” and “company” are used so interchangeably that many people assume that they are the exact same thing. However, there are actually several different types of “business,” of which one of them is “company.” Each different type of business is defined by a particular business structure, so it’s important to know what each business structure entails before you launch a company.
The four most common types of business structures are the following:
- Sole Trader
Within each of these 4 categories, there are subtle distinctions. For example, a partnership can be either general or limited. What’s important to keep in mind is that certain types of businesses are common for certain types of industries, due to the nature of the work performed. For example, most law firms and accounting firms are set up as partnerships.
As a general rule of thumb, the three business structures that you will consider as a business entrepreneur are Sole Trader, Company and Partnership. You can think of these from the perspective of how many people will be involved at the time of launch: a Sole Trader is a single individual, a Partnership is a group of individuals (but no more than 20), and a Company can be of any size.
Each business structure also comes with its unique share of legal and tax issues. For example, a Sole Trader pays income tax at his or her personal tax rate, whereas a Company pays income tax at the marginal tax rate for corporations.
If you are unsure of which business structure to choose, the Australian government has a very useful tool called “Help Me Decide.” You’re asked a series of simple questions, and you’ll get a recommendation of which business structure is right for you!