When you start up a business, it is important to consider the various structures that your business could adopt, including ‘sole trader,’ ‘partnership,’ ‘company,’ or ‘trust.’ This choice might seem to be a minor thing, but the correct business structure is an important part of running a business: it impacts your personal liabilities, asset protection, tax, and reporting commitments.
Choosing the right structure for your business starts with careful consideration of your business’ objectives, as well as state and federal laws. By defining your goals clearly, you can be confident that you will select the best business structure to fit your needs. Also, as your business grows, you may see fit to change your business’ structure in order to meet its new requirements. However, doing so can have adverse consequences with Capital Gains Tax, stamp duty, and asset protection.
Here, we have compiled the most common business structure types to help you decide which one best suits your business.
Sole Trader Structure
A ‘sole trader’ is an individual solely responsible for all business profits and debts (these cannot be shared with others). This structure is the most simple business structure to set up. If you, and only you, own your business, this might be the perfect structure for you. There is minor paperwork involved, but the individual sole trader is responsible for all tax and liability. Sole tradership costs around $87 for your business name for three years.
A ‘partnership’ is held by two or more people who started the business together. There are two types of partnerships: a general partnership, in which everything is shared equally; and a limited partnership, in which one partner controls the business while the other/s add to, and receive part of, the profits. A partnership structure is relatively easy and inexpensive to set up.
Partnership carries a dual status as a sole proprietorship or limited liability partnership, depending on the entity’s liability structure and funding. However, a partnership business structure is not often recommended because of the legal concept of ‘joint and several liability,’ which can make partners responsible for errors made by the other partner.
A ‘company’ is a legal entity that is created to conduct business. Businesses that adopt the company structure become a legal person separate from those who have established it. Much like a sole trader, the company can be taxed and is legally liable for its actions.
The key benefit of a company structure is the ability to avoid personal liability. However, there is a disadvantage in the set-up and ongoing administrative costs due to additional reporting requirements.
Discretionary Trust Structure
A ‘discretionary trust’ is the most common small business structure in Australia. This structure describes a relationship where the trustee carries out business on behalf of its beneficiaries. The stakeholders involved do not have fixed power or fixed interest in the trust funds, and the trustee has the discretion to decide which beneficiaries receive the trust’s capital and income.
A discretionary trust is an effective business structure because it can provide asset protection, flexibility, and access to a 50% general capital gains discount. A discretionary trust set up as shareholder of a company is another option to consider.
Unit Trust Structure
‘Unit trust’ is an unincorporated business structure that allows owners to hold assets and provide profits directly to individual unit owners, rather than reinvesting them back into the business. The beneficiaries subscribe for the units in much the same way as shareholders in a company subscribe for shares. A beneficiary is entitled to the trust’s income and capital in proportion to the number of units held in a common unit trust.
A unit trust is an effective business structure for unrelated parties to go into business together. The disadvantage of a unit trust is that stamp duty is payable on the transfer and sale of units.
Are You Making One of These Common Structure Mistakes?
Common Mistake 1:
You are operating as a sole trader while holding substantial assets like the family home in the individuals’ names.
Common Mistake 2:
You are trading as a company when the company shares are held in individuals’ names.
Common Mistake 3:
You are operating all of your businesses or owning all of your assets under one entity.
Common Mistake 4:
You are operating as a sole trader while other family members earn lower incomes than you.
Common Mistake 5:
You are purchasing investment properties or other assets with high capital growth while operating under a company structure.
So, are you striving to find the best business structure? Book a free one-hour consultation to discuss the best options for you.
Book a free 1 hr meeting with our expert accountants to discuss your business structure and how we can help.
Download our Structure Infographic for a summary of the main points.
Material on this website is general in nature and does not take into account your particular circumstances. Before you make any financial decision based on this advice you should consider with an adviser, whether it is appropriate to your individual financial circumstances. In addition, the examples provided on this page and on this website are for illustrative purposes only.
Every effort has been made to check the accuracy of the information contained on this page and on this website, Accountants 2 Business, its officers, representatives, employees, and agents disclaim all liability, for any mistake or omission contained in this website for any loss or damage incurred by anyone relying on the information.
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We will review your business structure and tax plan as part of our process at no additional fee, and provide detailed insight to your business performance and can help you with profit and cash flow strategies to ensure that you get the most from your business.
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