Choosing the right business structure
In the rush to start your new business venture, it could be easy to gloss over the pros and cons of various business structures. But it’s critical that you fully consider your options, as the structure you choose can have major implications from an operational and tax point of view.
For the most part, the structure you choose should be dictated by your business objectives. There may also be justification for using a combination of entity types e.g. business operating as a trust, with assets owned in a company.
Here we discuss the four main business structures:
Sole Proprietor
A sole trader business structure is a person trading as the individual legally responsible for all aspects of the business. This includes any debts and losses, which can’t be shared with others. This is the simplest, and relatively inexpensive business structure that you can choose when starting a business in Australia. As a sole trader, you’ll generally make all the decisions about starting and running your business, although you can employ people to help you.
Pros
- Simple to setup and operate
- Cheaper to setup
- Provides you with full control
- Fewer reporting requirements
- Doesn’t require a separate bank account
- Eligible for small business CGT concessions on sale of business
Cons
- Has unlimited liability, providing you with less protection of your hard earned assets.
- Limits your flexibility in dealing with income, in that you can’t split business profits with family members.
Company
A company is a separate legal entity, unlike a sole trader or a partnership structure. This means the company has the same rights as a natural person and can incur debt, sue and be sued. The company’s owners (the shareholders) can limit their personal liability and are in a lot of instances not liable for company debts. A company is a complex business structure, with higher set-up and administrative costs because of additional reporting requirements.
We can help you register a company with the Australian Securities and Investments Commission (ASIC). Company officers and directors must comply with legal obligations under the Corporations Act 2001.
Pros
- Is a separate legal entity, limiting your liability compared to other structures.
- Enables you to manage your income and expenses more effectively.
- Allows you to use the company tax rates of 28.5%.
- Easier to sell all or part of the business.
Cons
- Has higher setup and ongoing costs.
- Is a more complex business structure to start and run.
- No general discount (currently 50%) on capital gains made in the company.
Partnerships
A partnership is a business structure that involves a number of people who carry on a business together. You may choose a partnership over a sole trader structure for example, if you’ll be jointly running the business with another person or a number of people (up to 20). There are two types of partnerships – general and limited. Partnerships are governed by the relevant law depending on your state or territory.
Pros
- Simple to setup and operate.
- Fewer reporting requirements.
Cons
- It’s not a separate legal entity, so you and your partners are personally liable.
- You and your partners pay tax on your share of the profits, limiting your flexibility.
- Change of partners generally means a complete new business and extra administration.
Trusts
There are various types of trusts which can be used for different purposes, including, but not limited to, discretionary, testamentary, unit and business trusts. The trustee is responsbile for the day to day operation of the trust and controls it’s assets.
Advantages
- Can be a tax effective structure, particularly a discretionary trust.
- Trustee can be a company, which provides further asset protection.
Disadvantages
- Can be expensive to setup and operate.
- Requires formal annual administrative tasks.
- Not as easy to qualify for small business CGT concessions.
Find out which structure is right for you, call PPT Accounting on (03) 5331 3711.
SOURCE: Australian Government, business.gov.au
DISCLAIMER: The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.
