08 Nov Business Structures: Choosing the right structure for your business
When staring a new business, one of the biggest and most crucial decisions you will make is the business structure. The type of structure you set up for your business can depend on several factors, including the size of the business, employee requirements, market and industry needs, as well as capital and funding needs. Knowing how a business structure will affect your business, including tax implications, operating costs, asset protection and future growth planning is vital and can affect the choice you make. So, to help you understand which will best suit your business, we thought we could give you a basic rundown of the most popular business structures and what makes them different.
Sole trader structure
This is the simplest business structure available. As a sole trader, the business is operated in your own name, and you will be responsible for the management and control and all business dealings. In terms of tax implications for a sole trader, there is no separation between the business’ taxes and financial affairs and the personal tax of the business owner, the business’ income is treated as your own. The benefits of a sole trader structure are that it’s inexpensive to set up and you can keep any after tax profits, including when you sell. You will also, however, be responsible for any operating loses the business incurs.
A sole trader will:
- Use their individual tax file number to lodge returns for their personal and business finances.
- Receive business profits and losses as a part of their own income
- Have their business income taxed at individual rates, along with any other income received.
- Pay 9.5% of each employee’s earnings into their superannuation account, as well as PAYG withholding.
- Register for Goods and services tax is required.
A partnership business structure enables two or more people to enter into business together, and therefore equally accept income, profits and losses. Similarly, to a sole trader, a partnership is inexpensive to set up and the partners are personally (equally) responsible for any debt the business incurs, regardless of the cause. This can cause internal disputes if one partner refuses to pay, as the other partners are jointly liable for the entire amount.
As a partnership:
- The business itself is not liable for any tax, the taxes will come from the partners personally as a part of their share.
- The business will lodge a tax return which includes total income and each partners share in the business and therefore profits. If the business makes a loss the partners are able to offset their loss against any other income they earned.
- The partnership doesn’t account for capital gains/ losses at all for CGT assets, such as real estate. If the partnership decides to sell an asset, the profits or losses will be calculated based on each partners share of the asset.
- Each partner needs to arrange their own superannuation arrangements, as they are not employees of the business.
Setting your business up as an incorporated company means it will operate as a separate entity. This is a more complex business structure, is more in depth and expensive to administer and will also need to strictly abide by the rules and regulations in place by the Australian Securities and Investments Commission (ASIC). Companies have the benefit of being foundered by shareholders, which gives it a greater ability to expand and grow quickly. One of the biggest advantages to a company structure is the personal asset protection for owners as only the business can be liable for debts, not any one shareholder personally.
A company will:
- Pay its own tax on its own profits at a company tax rate.
- Need its own bank account and tax file number, it is a separate entity.
- Lodge its own tax return which includes the total business income, deductions and any tax it is liable for.
- Register for GST and pay if turnover is more than $75,000.
- Pay compulsory superannuation payments to any employees as required by law, as well as PAYG withholding.
- Show any directors fee, shareholder dividends or wages on that persons’ individual tax return.
A business set up under a trust structure acts as an formalised obligation where a person or a company holds income-earning assets or property in a way which benefits others. The person who holds these assets is known as the trustee and the ones who receive the income are known as the beneficiaries.
The trust structure results in increased asset protection, as the beneficiaries’ personal finances are not at risk of liability under any business debt. The business’ assets are legally owned by the trustee, be that a person or a company. One of the big differences of a trust structure is that although for tax purposes a trust is seen as a separate entity, the trust structure is actually not a separate entity, it is considered a legal relationship.
The setting up of a trust can be costly, and the administrative paperwork and details can be more complex than other structures.
The advantages of a trust structure are:
- The trustee can use his/her discretion to decide how to distribute income between beneficiaries, as long as the rules of the trust deed are abided by.
- Tax is paid by the beneficiaries at their personal tax rates, which can be substantially lower than that of a business.
- If all income is distributed, the trust itself may not be liable for any tax.
- The trust will have its own Tax File Number and ABN, and will be liable for any necessary GST obligations.
- Depending on the amount and type of income distributed to beneficiaries, a trust may not be liable for PAYG installments, unless the trust hires employees, in which case it will need to abide by PAYG withholding and any superannuation requirements by law.
Each business has individual requirements and therefore not one structure will suit all business types. It takes the consideration of costs, risks, growth plans and market changes to find a structure that is appropriate for now and in the future.
No one structure will suit all business types. Each individual business will have different requirements and growth plans. However, a consideration of what structure a business takes at the outset can minimise costs and risks to the business in the future. If you are considering a new business venture or changing an existing one, it pays to have the right advice and plan in place to ensure the growth potential and effective tax strategies from the get go.
Conrad Carlile offer expert knowledge of business planning and structures. We work closely with our clients to grow wealth, increase profit, improve and forecast cash flow as well as strategically planning your business for future growth and success. Contact our friendly team today on 07 3871 1522, or complete an online enquiry and we will be in touch to discuss your specific business needs.