Written byAn unincorporated business is a business that has no separate legal personality, so its owners contract in their own names and are personally liable for its debts.
Key points
- The owners enter contracts in their own names, and creditors can pursue personal assets such as a home or savings for business debts.
- Common forms include the sole trader, the partnership, a joint venture and an unincorporated association.
- Profits are not taxed in the business: they are allocated to the owners and taxed at each owner's own rate, usually a marginal rate.
- You still need an ABN if you carry on an enterprise, plus GST registration once turnover reaches the registration threshold.
- Unlimited personal liability is the usual reason owners move to a company as risk and staff numbers grow.
How an unincorporated business works
There is no separate entity standing between the business and the people who run it. The owner or owners sign contracts in their own legal names, hold the assets in their own names, and carry the debts personally. If the business is sued, for negligence or for breach of contract, the owners are the defendants.
Tax follows the same logic. A sole trader reports business profit on their individual tax return and pays tax at marginal rates. A partnership is not taxed on its profits: the profit is allocated to the partners, who each pay tax at their own rate. Registration with the ATO still applies, including an ABN if you carry on an enterprise, and BAS lodgement if you are registered for GST.
Common types of unincorporated business
A sole trader is one individual running the business and keeping the profits, and the tax reporting is the lightest of any structure. A partnership is two or more people sharing profits, losses and management, with the profit flowing through to each partner's individual return.
A joint venture is a temporary commercial arrangement for a specific project, treated according to the contract between the parties. An unincorporated association is the usual form for community groups, clubs and volunteer committees. It is not a separate legal entity, so committee members and volunteers can be personally exposed if something goes wrong.
Each form is chosen for a different reason. Simplicity and control favour sole trading, shared skills and split costs favour partnerships, and community groups often stay unincorporated for ease of governance.
When to consider incorporating
Incorporating starts to make sense when the business takes on real risk: long-term premises, regular public access, employees, or large supplier contracts. It also matters if you want to raise investment, issue shares, or put limited liability between the business and your personal assets.
A company limited by shares is a separate legal entity with limited liability for shareholders, at the cost of more compliance: ASIC registration and annual statements. An incorporated association suits member-based clubs and community groups. A trust is sometimes used for asset protection and tax planning, and needs specialist advice. Speak with your accountant or solicitor before you change structure.
Example
Two people run a cafe as a partnership. They share the profits and the debts, and each reports their share of the profit on their own tax return. When they sign a ten-year lease on the shopfront, the landlord asks both of them to sign in their personal names. That is the trade-off in plain view: the structure costs almost nothing to set up, but the people behind it, rather than an entity, stand behind the lease.
Not to be confused with
- Company
- a company is a separate legal entity, so it holds the contracts and the debts rather than the owners
- Sole trader
- a sole trader is one kind of unincorporated business, not a separate alternative to it
Frequently asked questions
Who is liable if an unincorporated business goes into debt?
The owners are. Because there is no separate entity, creditors can pursue personal assets such as savings or the family home to recover business debts, and the owners are personally named if the business is sued. Unlimited personal liability is the main legal risk of staying unincorporated.
Do I need an ABN if I'm a sole trader or in a partnership?
If you are carrying on an enterprise, you generally should register for an ABN, whether you trade as a sole trader or in a partnership. The ABN goes on your invoices and makes GST reporting and BAS lodgement much easier. Check the ATO's guidance for your situation.
Do unincorporated businesses pay GST?
They do once annual turnover meets the GST registration threshold. At that point you must register for GST and lodge Business Activity Statements. The structure does not change the rule, because GST follows turnover rather than whether you are incorporated. Your accountant or the ATO can confirm the current threshold.
Can an unincorporated business employ staff?
Yes. Being unincorporated does not stop you employing people. You need to set up PAYG withholding, withhold tax from wages, lodge PAYG reports, meet superannuation obligations for eligible employees, and comply with workplace law. Keep clear records of wages and contributions.
How long do I need to keep business records?
Generally five years for business records that relate to tax and BAS, including income, expenses, invoices and payroll. Specific rules apply depending on the record type, so check the ATO's requirements. A separate business bank account makes those records much easier to produce.
Related terms
Sole trader
A sole trader is the simplest Australian business structure: one person owns and runs the business, keeps the profits, and is personally liable for its debts.
Read definitionPartnership
A partnership is a business structure in which two or more people or entities carry on a business together with a view to profit, sharing profits, losses and liabilities.
Read definitionCompany
A company is a separate legal entity, formed under the Corporations Act 2001, that can own property, borrow and be sued in its own name, independently of its shareholders.
Read definitionPty Ltd company
A Pty Ltd company is a private company with its own legal identity that cannot offer shares to the public and limits shareholders' liability to their share capital.
Read definitionTrust
A trust is an arrangement in which a trustee holds legal title to assets and manages them for the benefit of beneficiaries under a trust deed.
Read definitionLiability
A liability is a legal responsibility to pay money or answer for a loss; in accounting, a present obligation to transfer an economic resource, shown on the balance sheet.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.