Which is the best business structure for you?
There are approximately 2 million small and medium businesses in Australia, each functioning in a way that suits their size and structure. However, choosing the right business structure is vital for your business and will have asset ownership and taxation implications. To choose the right business structure, you must first understand the functions and use for the most common structures used in Australia.
Which one is the best method for running your business? Structures to consider include sole trader, partnerships, companies and trusts. Each business structure has its positives and negatives.
Business Structure:Sole Trader
This structure is possibly the most common and one of the easiest for running a business. This method is when one person is responsible for all decisions and aspects of the business. However, you are personally legally responsible for the business and all of its actions. You can hire people to assist you in running your business and operate in every way as a business. You will use your own tax file number for tax returns, be responsible for your superannuation and will pay yourself from the profits of the business. Losses from the business can be offset by any other earned income.
- Not very expensive to set up, anyone aiming to begin a business should be able to understand the process
- You have utter and complete control. Even if you hire other employees, you will still be the manager and can easily make decisions
- There is not a huge amount of paperwork to begin your business and there is no need to register a name, you can simply use your own.
- If your business expands or you can no longer run your business as easily, you can simply and quite easily change your structure.
- If you have ultimate control of the business, the debt of the business may interfere with your personal assets. It is usually harder to obtain finance when you own and run your own business.
- You may not be able to easily get time off, especially if you have no other employees.
Business Structure: Partnership
A partnership is when multiple people, a maximum of twenty, equally own and run a business. The decisions of the business and finances are shared, meaning the work load is not all resting upon one person. However, it can be difficult to make decisions that are unanimous – and there may be conflict as a result. The business must have a different tax file number to the individuals and every partner will pay tax; each individual is still responsible for their own super.
- The business is not very expensive to set up and run.
- Decisions of the business are all shared between the partners.
- The finances of the business become easier as you are not responsible for it all yourself, and you now have the resources of all the partners.
- Each partner is responsible for the business, no matter how much they own.
- It can be hard to make decisions as everyone must have a say.
Business Structure: Company
A company is very different to the two previous structures as it is a different legal entity. The money earned belongs to the company and it has a set tax rate of 30%. The decisions of the business are run by directors and, if applicable, those who have bought a significant amount of shares. A company can be privately owned (by individuals) or publicly owned (by shareholders).
- Owners and directors are not personally liable for the business debts and your assets are not necessarily at stake.
- There is a flexibility in profits given to shareholders.
- When tax is already paid by the company, the tax of the shareholders’ is reduced.
- You can make tax deductions on salary costs using the company.
- The selling of the business is easy and the profits are usually substantial.
- The complexity of beginning a company is fairly large and there is a huge amount of paperwork to begin functioning
- The costs to set up is also large
Business Structure: Trust
A trust is when a trustee carries on business for the benefit of other people (the beneficiaries). The trust is not a separate legal entity and the trustee can be an individual or a company,who is in charge of debts and assets. There are two forms of trusts, discretionary trusts or unit trusts. In a discretionary trust, the trustee decides how profit will be distributed among beneficiaries; in a unit trust, it will benefit certain people in predetermined proportions. The distribution of these units is dependent on the number of units held by each beneficiary.
- A trust does not usually get taxed if all assets are being distributed properly
- A trust gives asset protection for the business.
- The assets of the owner become separate to the business and therefore you have more control and protection over your assets.
- Beneficiaries in the trust are not usually involved in the debt of the trust.
- Beneficiaries of the trust pay their own tax from the income they receive at their own rates
- The set up of a trust is fairly expensive and involves difficult legal steps and therefore involves a solicitor or accountant to set up.
- The trustee must function for the benefit of the beneficaires
- The operation of the business must follow the conditions of the trust deed and there are regulations to trust must follow.
- A trust cannot set aside profits for expansion without tax penalty rates.
Which business structure works best for you? It depends on your situation and the needs of your business. For your free, 10-minute phone consultation, please contact us today.