The right business structure is the foundation of a business. It not only minimizes tax implications, but also provides asset protection and improves business liquidity.
There are four main business structures commonly used by small businesses in Australia. Before choosing which is right for you, consider the pros and cons for each.
It’s an individual operating as the sole person legally responsible for all aspects of the business.
It is taxed as an individual.
- Most simple and inexpensive to set up and operate
- Business owner has full control
- Less compliance and legal requirements
- Business losses can offset other incomes in personal tax return (conditions apply)
- Business owner is personally responsible for all debts and losses
- Liabilities are unlimited, and can be detrimental to personal assets
- Business profit can be taxed at the top marginal rate
- Not easy to raise finance and change ownership
It’s a legal entity separate from its shareholders and directors.
This is a complex business structure. It needs to be registered with the Australian Securities and Investments Commission (ASIC). Company officers and directors must comply with legal obligations under the Corporations Act 2001.
It’s taxed at a company tax rate–currently for financial year 2016/2017 is 27.5%.
- Financial liability is limited to the company assets
- Profits can be reinvested in the company or paid out to shareholders as dividends
- Easier to raise finance and transfer ownership
- Unlimited life
- Higher set up and administrative costs
- More reporting requirements and regulation
- Limited tax concession, e.g. no capital gains discount and tax free threshold
- Tax losses stay within the company structure
It’s an association of people or entities running a business together, but not as a company.
All partners have shared control and management of the business. Unlike a company, a partnership is not a separate legal entity, business partners are personally liable for the debts of the business.
The partnership does not pay income tax on the income earned, instead, partners pay tax on the share of the net partnership income they each receive.
- Relatively easy and inexpensive to set up and operate
- Shared responsibility and obligations among partners
- Broader skill set and management base
- Easier to get finance with the resources of several partners
- Each partner is personally liable for debts and losses
- Change of ownership can be difficult, depending on the partnership agreement
- Profit is taxed at the partners’ personal tax returns, can be at the top marginal tax rate
- Potential conflicts among partners
It’s an entity that holds property or income for the benefit of its beneficiaries.
The law of trusts is quite complex. It requires a formal trust deed that outlines how the trust operates and the trustee to undertake formal yearly administrative tasks and legally responsible for its operations.
Income tax on profits can be taxed on the beneficiaries or trustee (on behalf of the trust), depending on the circumstances.
Trusts are often created because of the flexibility they allow in tax planning, tax minimization and asset protection.
- If trustee is a company, liability can be limited
- Greater flexibility in distributing profits to beneficiaries
- May be able to access some tax concessions
- Can be expensive to set-up and operate
- More compliance and legal requirements
- Limited life (usually 80 years in NSW)
The key points in considering which structure is right for you include:
- The tax you’re liable to pay
- Asset protection
- Ongoing costs
It is important to note that you can change your business structure throughout the life of your business. As your business grows and expands, you may decide to change your business structure, or to restructure your business.
Dynamic Accountax can explain to you in more depth of each of the available structures and help you to decide which one is the best suit. Once you decide, we can help you with the initial set up and ongoing administration.
Please refer to our Small Business Advice