One of the key decisions you’ll make when starting a business is its structure. Your choice of structure will depend on the size and type of business and how you want to run it. Each structure may have an impact on key areas such as tax you’re liable to pay, asset protection and costs to set up. There are a number of structures that you can choose from when starting or expanding your business.
Your business structure can determine:
the licenses you require
how much tax you pay
whether you're considered an employee, or the owner of the business
your potential personal liability
how much control you have over the business
ongoing costs and volume of paper work for your business
You can change your business structure throughout the life of your business. As your business grows and expands, you may decide to move to a different type of business structure.
Setting up of this business structure is comparatively easy and inexpensive compared to other structures.
The application of an ABN and registration of a business name is required.
The profit of a sole trader business structure is reported in the individual tax return of the owner and income tax is paid based on their marginal tax rates.
The single largest drawback of this structure is the risk that the owner is personally liable for all debts and liabilities of the business – protecting your personal assets is crucial.
A partnership involves two or more people in managing and operating a business.
A partnership has its own ABN, Tax File Number, GST registration and it will lodge its own tax return each year.
Ownership can be equal ((i.e. 50/50) or different (i.e. one partner may have 40% interest and another 60%).
Whilst a partnership must lodge a tax return, the business does not pay income tax as the profits (or losses) are distributed to the partners in accordance with their ownership percentages.
Similar to sole trader structure, the partnership has no asset protection and the partners are personally liable for business debts and liabilities.
A company is considered a separate legal entity under Australian law. Companies are registered with ASIC, directors and shareholders are subject to a code of conduct governed by law called Director’s Duties.
In Australia companies pay tax at 27.5% for a small business entity. Profits of the company are distributed to owners (shareholders) via a dividend. Owners receive the benefit of the company tax paid as a franking credit attached to the dividend. Dividends need to be disclosed as income in the owners’ individual tax returns.
Companies are an attractive business structure as they have the advantage of limited liability – the debts incurred by the Company are not the responsibility of directors and shareholders - unless related to employee wage entitlements, superannuation or GST.
Companies are flexible in terms of new owner admission or removal, this is achieved by issuing or transferring shares.
Unlike other structures, a Company does not get the benefit of the 50% CGT Discount – meaning when a Company sells a CGT Asset the Capital Gain is taxed at the full company tax rate.
There are a few different types of Trusts – the most common trust in the SME space are Discretionary trusts, also known as family trusts.
Discretionary Family Trusts are most suitable for Family Businesses as they allow for effective and easy distribution of Trust Net Income. Income (business income, passive income or capital gains etc) is distributed to Trust beneficiaries within the family group only.
Unlike a Company, a Trust is not a separate legal entity, a Trust is governed by a Trustee, who deals with issues such as income distribution and trust asset and liabilities.
Discretionary Trusts are most effective when coupled with a Company. A Company can act as a Trustee, which provides asset protection.
Trusts are more complex to setup and administer than a Sole Trader, however, KPI Business Advisory can walk you through this.
Please contact KPI Business Advisory’s Head of Taxation, Adam Wotton at firstname.lastname@example.org if you would like to ensure your business structure is still most beneficial to you. Alternatively you can contact us at 1300 001 132 or via our website.