Company? Trust? Partnership? Sole Trader? Choosing the best structure to operate your business under depends on a number of factors, writes Adelaide accountant Kym Nitschke.
Before making a decision there will be a number of considerations, including:
– The type of business and how many people will be involved
– Future planning – expected size (income generation) and profitability of the business
– Risk management – do measures need to be taken to protect business or personal assets?
– Succession planning – your plans for the future of of the business, even beyond your own tenure
After considering these factors, it is important to analyse how each structure works, and the potential benefits and drawbacks in the context of your business.
A sole trader setup is the simplest and cheapest business structure. A sole trader is:
– The sole owner of the business, with full control of assets and business decisions
– Legally responsible for all aspects of the business and does not have the benefit of limited liability (personal risk)
– Given fewer reporting requirements, and as a result accounting costs are usually lower
– Responsible for lodging tax via a personal tax return (with a personal TFN) at their marginal tax rate
– Able to operate without a separate bank account
– Unable to split income with a family member and are personally liable for all tax payable on income
A partnership is an option for a group of people who run a business together. A partnership is:
– Generally has less expensive setup and accounting costs compared to a trust or company
– Under a separate TFN for the partnership
– Required to lodge a partnership tax return each year
– Not required to pay income tax, as each individual pays tax on their share at their marginal rate
Setting up a trust has a number of potential benefits and drawbacks, including:
– The potential to use the trust to protect assets
– Tax minimisation, through a profit distribution to beneficiaries
– Beneficiaries pay tax at their marginal rate
– The potential to carry forward losses
– Generally more expensive to set up and operate
– Requires a formal trust deed that outlines how the trust operates
If you plan to set up your business as a company, you will need to consider:
– A company is separate legal entity and must be registered with ASIC
– The higher set up and running costs that usual go with setting up and operating a company
– Tighter requirements – you must comply with the Corporations Act 2001
– Any money earned belongs to the company and not the person or people that owns it
– A company has limited liability (potentially lower personal risk) compared to other structures
– The tax rate is 30%, or from 2015-2016 small businesses with an aggregate turnover of less than $2 million the rate is 28.5%.
– A company can be passed down to next generation ‘perpetual succession’
Setting up with the right business structure is critical not only for the future of your business, but for the founders and people involved.
The information covered in this blog will hopefully help kickstart your thinking, but it is important to speak to an experienced accountant before choosing the best structure to operate your business under.
At Nitschke Nancarrow, we’re happy to help. Call our Adelaide office on (08) 8379 9950 or send me an email.
– Kym Nitschke, Managing PartnerTags: Accountant, Adelaide, Australian Tax Office, Business, company, setup, sole trader, structure, trust