Are you starting a new business you need to think what Business structure you will operate as, or are you currently already operating but are you the best structure to benefit you? Will you be a sole trader, in a partnership, a company or a trust? There are advantages and disadvantages to consider for each. Factors to consider are the cost of set-up, the taxation implications, the expense of ongoing administration and your personal financial liabilities.
SOLE TRADEROperating as a sole trader is the most common structure used when starting a business.
AdvantagesThe structure is simple and inexpensive to set up and operate
You have full control of the business
Sole traders are taxed as individuals and pay income tax at personal tax rates
You receive full benefits of profit made by the business
You are not considered an employee of your own business and are free of any obligation to pay payroll tax, superannuation contributions or workers' compensation on income your draw from the business
Things to think aboutYou are legally responsible for all aspects of the business
Unlimited liability which means all your personal assets are at risk if things go wrong
PARTNERSHIPA partnership is an agreement between two or more people to finance and operate a business
Advantages Partnerships are inexpensive to set up and are relatively easy
There are more people to share the work load and the losses and legal responsibilities
With more than one owner the ability to raise funds may be increase
Partners provide moral support and more creative brainstorming
Things to think about Profits must be shared with others
You and your partners are responsible for the debts of the partnership unlimited liability
The partnership may end with the withdrawal or death of a partner
You cannot mae decisions on your own you must negotiate with your partner
COMPANIESIf you operate your business as an incorporated company, the business is a distinct legal entity that is regulated by the Australian Securities and Investment Commission.
Advantages A company pays tax on its own profits
Asset protection. If the company’s business fails, the personal assets of the shareholder are protected
It is easy to admit or retire partners by simply buying or selling shares, or alternatively by issuing shares.
Shareholders have a fixed interest in the company so they can be certain of their entitlements. Franked dividends can be passed to shareholders who can claim a refund of any excess imputation credits.
The tax is a 30% flat rate
Things to think about A company is more expensive to set up and are more complex to administrate
Cannot distribute losses to individuals
No easy way for a company to pass tax-free amounts to shareholders without them being taxed in the shareholders hands
A change in share ownership can cause pre-CGT assets to be treated as post-CGT assets
A change in asset ownership can cause pre-CGT shares to be taxed as post-CGT shares
Companies can be costly to wind up
Your company must make super contributions for any eligible workers it employs.
TRUSTIf you operate your business as a trust, you’re a trustee you are responsible for holding property or income for the benefit of others (the beneficiaries).
Advantages Reduced liability - especially if corporate trustee
Asset protection.
Flexibility of asset and income distribution
A trust has perpetual existence and does not cease
with the death of a beneficiary.
Things to think about Can be expensive and complex to set up
Can not distribute losses, only profits
Difficult to dissolve, dismantle, or make changes once established particularly where children are involved.
Any profits retained to reinvest into the business, will incur penalty tax rates
