Trading as a Company when the company shares are held in individual’s names (e.g. husband and wife).
- Tax implications – Your business structure dictates how much tax you need to pay at the end of the year.
- Business Growth – Your structure affects your ability to bring in investors, offer equity to key staff, or eventually sell the business.
- Personal Liability – Your business structure determines your level of personal liability if something goes wrong.
Do you know which business structure is the best fit for your business?
It is always beneficial to choose the correct structure from start-up. However, as your business grows, what was the best or most cost-effective structure to start with may no longer be suitable. We have helped many business owners review and realign their business group structure, to best fit with their growth plans or exit strategy.
An individual, as the exclusive owner of the business, trading on their own.
A sole trader is legally responsible for all aspects of the business. This includes any debts and losses, which cannot be shared with others.
This is the simplest business structure and a relatively inexpensive one for a start-up business. However, the downside is the exposure of all your personal assets if things were to go wrong, such as a lawsuit, bankruptcy or relationship breakdown. There is also no opportunity for income splitting under this structure.
A partnership involves two or more people, companies and/or trusts who go into business together (not as a company).
Partnerships are relatively easy and inexpensive to set up. However, be very careful with this structure, as each partner is liable for their share of the partnership debt as well as those of the other partners, even if the partner had no knowledge of and was not responsible for the debt. This is called “joint and several liabilities”, which many business owners are not aware of.
A legal business entity owned by shareholders and run by directors, which has the same rights as a natural person and can incur debt, sue and be sued.
Under a company structure, business operations are managed by directors and the company is owned by shareholders. Shareholders can limit their personal liability and are generally not liable for company debts. The downside of a company structure is higher set-up and administrative costs because of additional reporting requirements with the Australian Securities and Investments Commission (ASIC). Companies have a fixed income tax rate, however no access to 50 per cent general Capital Gains Discount.
A trust is a relationship where a person (the Individual or Corporate Trustee) is under an obligation to hold property for the benefits of other persons (the beneficiaries).
A discretionary trust is a trust in which the beneficiaries’ entitlements to receive capital and income are not fixed, but at the discretion of the trustees. A discretionary trust with a corporate trustee is a popular structure for holding assets or running a business, because it offers asset protection, flexibility in income splitting and access to 50 per cent general Capital Gains Discount. However, this is not a suitable business structure if you plan to go into business with unrelated parties or have the intention to bring in investors at a later stage.
A unit trust is similar to a discretionary trust, however the beneficiaries generally have fixed entitlement to capital and income.
A unit trust has less regulation than a company and is easier to wind up. It also has access to the 50 per cent general Capital Gains Discount. Units in a unit trust can be easily transferred, making this a potentially suitable structure for unrelated parties going into business together. The downside is stamp duty is payable on the sale/transfer of units in many states. Moreover, unit trusts offer less flexibility in income splitting and asset protection compared to a discretionary trust.
Could you be making one of these common business structure mistakes?
Your business structure can also have a big impact on your tax position – choosing the right one can potentially save thousands of dollars in tax and is critical to business success.
Operating all your businesses or owning all your business or personal assets under one entity.
Operating as a Sole Trader or Partnership while there are other family members earning lower incomes than you.
Purchasing investment properties or other assets with high capital growth under a Company structure.
Operating as a Sole Trader or Partnership and having no consideration for succession or estate planning.