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- On February 25, 2019
Starting a new business is both very interesting and challenging. There are a large number of things that you need to plan and work on from business systems, Marketing, Sales, Taxes etc
However, choosing a business structure is very critical just like the foundation of the house is very critical for the house. The cost of setting up the business is very nominal in the scheme of business
The four main business structures commonly used by small businesses in Australia are:
- Sole-Trader – It is an individual operating as the sole person legally responsible for all aspects of the business. Like other structures, as a Sole trader, you can employ people to help you run your business.
- Company – a legal entity separate from its shareholders. The origin of the Company is from Latin word Corp which means Body. The law gives the company the same rights as a natural person and thus it can incur debt and be sued.
- Partnership – It is an association of people or entities running a business together, but not as a company
- Trust – It is an entity that holds property or income for the benefit of others. A trust is a relationship where a person (the Trustee which can either be an individual or a company) is under an obligation to hold the property for the benefit of other persons (the Beneficiaries). There are 2 main types of trust Discretionary and Unit. In Discretionary trust, the beneficiaries’ entitlements to receive capitals and incomes are not fixed but at the discretion of the trustees whereas in unit trust the distribution is as per the unit holding.
Two of the most important factors that business structure determines are Tax effectiveness and Asset Protection.
It’s best to explain tax effectiveness with an example. Let’s see how different structures result in different tax outcomes.
John runs a cafe and it earns about $180k in profits every year. He is married to Debra and has 3 kids. 2 of them are over 18 studying full time.
Tax Liabilities on Different Business Structure
|Sole Trader||Company||Discretionary Trust|
|Total Tax Paid||$57697||$43089||$33224|
It’s clear that there are significant savings if you are operating your business as a discretionary trust. However, there are other factors that you need to look into for example If you intend to claim the R & D incentive, you cannot use a trust structure. It is important that you speak with us or your accountant before you set your structure up
A Corporate structure/Company on its own or by using it as a trustee of a Trust can offer business owners asset protection or Limited liability
A company is only liable to trading partners and creditors up to the value of the share capital. For example, if you started a company with 2 $1 shares, the total amount that any creditor can take is $2. The director of the company is not responsible for any debts provided the company was not trading while insolvent or director has given a personal guarantee for a loan on behalf of the company.
The director’s penalty regime has been in existence since 1993 and it expanded the DPR to include superannuation guarantee obligations from June 2012.
Choosing a correct business structure is a very critical element of starting your business journey. The business structure that you choose must be appropriate to the size and the expectations of you for your business. Changing your business structure can be very costly. you might be exposing yourself to Capital gains tax, Stamp duty issues apart from operational issues that a structural change causes. As the saying goes
” Prevention is always Better than Cure”
General Advice Warning
The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice.
Taxation, legal and other matters referred to on this website are of a general nature only and are based on our interpretation of laws existing at the time and should not be relied upon in place of appropriate professional advice.