Aside from causing operational pain, the wrong business structure can cost hundreds of thousands of dollars over the life of your business. However, choosing the right structure can maximise tax opportunities and minimise risk, ultimately contributing to the financial success of your business.
Getting the right business structure in place is one of the biggest business decisions you can make throughout your business lifecycle.
Company
Most people believe the easiest way to protect their personal assets is to set up a company. Yet a company structure can in some circumstances be inefficient at minimising tax and can also result in higher compliance costs and higher income taxation then otherwise required.
What you need to know: Companies are more expensive to set up than sole traders or partnerships and usually cost more to run. They also have more tax reporting requirements. Companies are regulated by the Australian Securities & Investments Commission (ASIC), unlike partnerships and sole traders.
Trust
When set up correctly, trusts, can act as a structure that can be effectively used to minimise both income and capital gains taxes. In many cases it enables the ability to distribute to other beneficiaries of the trust, most commonly within a family group.
What you need to know: Trusts can offer more advantages compared with other structures. For example a trust can continue to exist even if the person running it passes (unlike sole traders or partnerships) and it gives more protection to assets. It can be effective in restricting exposure to personal assets in certain situations. Discretionary trusts can also allow flexibility in where, and how much of, the trust’s income is distributed to.
Partnership
If you are considering a partnership, the devil is in the detail. Many partnership agreements overlook issues that can cause rifts in partnership. Before entering into a partnership, meet with your accountant and a business lawyer to draw up formal agreements.
What you need to know: You must share the profits from your business with the partners. You and your partners are responsible for all the debts in the partnership, even if your partner was the one who got the partnership into debt.
Sole Trader
Running as a sole trader is probably the easiest and most cost-effective way to structure a business (when compared to a trust or company). You report the business’s profits on your own tax return and pay tax at individual rates, not company tax rates.
What you need to know: You are personally responsible for the debt of the business and may have to sell your own possessions to pay for it.
Unfortunately, without the right business advice it can be an easy mistake to get your business structuring wrong. We’ve covered this in an earlier blog: 5 Signs your business structure is wrong for you.
Is your business structure right for your situation?
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