There are a number of structures you can choose from when starting or changing your business. This may seem like a simple matter but the structure of your business impacts on your tax, personal liabilities, asset protection and reporting obligations.
Obviously it is beneficial to choose the correct structure during the initial start-up phase, however it is possible to change your business structure throughout the life of your business.
Why is choosing a business structure so important?
Your business structure will have an impact on:
•How much tax you pay
•Whether you’re legally considered an employee or the owner
•Your personal liability
•How much control you have over the business
•Ongoing operational costs and expenses
Choosing a business structure
There are four main business structures used by small businesses in Australia:
Each has its own tax implications, advantages and disadvantages, and potential impact on how you run your business.
If you set up your business as a sole trader, you will be the sole person responsible for the business. You alone will own the business – with full control over all business decisions and assets.
As a sole trader, there are few reporting requirements and minimal costs associated with setting up the business as a sole trader.
Perhaps the biggest disadvantage of this business structure is its personal liability component. This means that you can be held personally liable for your business’s debts and liabilities. If something goes wrong, your personal assets could be seized.
A company is a separate legal entity which is run by directors and owned by shareholders.
This business structure is more complex, and has higher setup and operating costs than the other structures.
This structure shields you from liability compared to the other structures, but you could still be held accountable for the company’s liabilities. For example, company directors are often asked for personal guarantees, which can effectively remove the liability protections built into this structure.
A partnership is a business structure run by a group of people - the partners. These partners:
•run the business
•divide the profits.
A partnership is not a separate entity, and all partners are personally liable for the business’s debts. Like a sole trader, the partners each pay tax on the business income they receive, filing it on their personal tax returns.
Like a sole trader, this business structure is fairly easy and affordable to set up.
A trust is a structure operated by trustees for the benefit of the trust’s beneficiaries.
A trust is a popular business structure because it offers protection of assets and flexibility in income splitting which is tax effective.
There is obviously no clear-cut outcome of which structure is best, it is definitely dependant on your business and circumstances. Choosing the right business structure can save thousands of dollars in tax and getting the structure right is critical to business success.
It is really important to seek advice to get the right structure for you. Get in contact with us if you would like to chat further about your business structure.