Thinking of starting your own business? Having a sound business plan, budgeting revenue and expenses and determining how much capital is required are just a few of the decisions that need to be made. Also important is your business structure.
Choosing the right structure has both tax and asset protection implications. Not all structures will suit all businesses so it’s important to choose the right one for yours. Here’s a plain English explanation of the four different business structures available.
A sole trader is the simplest and cheapest option for you to operate a business. Once you have an ABN under your own individual name, this structure means you are the trading entity and all of your income and expenses will be treated as your personal net income and taxed at your marginal tax rate.
A disadvantage of this structure is that your personal assets are at risk if something was to occur within your business. It is imperative you have the correct insurance policies in place to protect yourself from any potential litigation.
A trust is an obligation imposed on individuals or a corporate entity to hold property or assets for the benefit of others (beneficiaries/unit holders).
A trust structure can operate a business as well as invest in assets. The usual recommendation is that a trust that is operating a business does not also hold investment assets as those assets could be at risk in any potential litigation action. A corporate entity can act as trustee of the trust instead of individuals, which can help to limit the litigation risk to assets held by the trust and not personal assets of the individuals involved in the business.
A trust can either be a discretionary trust, where net income is distributed each year, usually to members of a family group in the family trust scenario, at the discretion of the trustees. Or the trust can be a unit trust where income is distributed each year to unit holders in accordance with their unit holding percentage. The income would then be included in unit holders own tax returns each year and tax paid at their marginal rates.
As a separate legal entity, a company offers the most asset protection in most scenarios and is generally the structure most used for businesses. The company pays tax on its net profit at a flat rate of 30% (28.5% for small businesses). The company can also pay dividends to its owner(s) as a return of investment.
Two or more (up to) legal entities can form a partnership to jointly run a business. The partnership does not pay tax as all of the income will be distributed to each partner in accordance with their partnership shares for inclusion in their own tax returns.
Generally each partner is jointly and severally liable which means that as well as having a shared liability for the debts of the partnership each partner is also personally liable for the debts of the partnership.
Given the uniqueness of each business structure, it is important to seek professional advice to determine which structure is right for your business. Contact your local Accru advisor to discuss your specific circumstances.
By Steve Kristianto, Accru Rawsons Brisbane