If this year is the year you have finally decided to start up that new business you have always dreamed of starting, it is crucially important to spend the time and money on getting the ownership structure of your business right from the very beginning.
More often than not, the structure you start your business with initially is the structure you are stuck with long term. Things like stamp duty where property and other business assets are involved can become massive hurdles in the way of making a switch in structure once the business is up and running. Or even things like having to notify all your customers of changed payment details or a business license can be a real burden.
Most people set up by owning the business in their individual name as sole traders, because this seems easier than having to pay an accountant to way up the best options for you. However, this strategy is short-sighted.
A strategy to consider is running the business through a company that has you and your partner (if applicable) as shareholders and or directors. The advantage to this is that it separates your businesses legal life from your or your partner’s personal life. This means that (in most cases) your personal assets are safe if a customer or competitor were to sue you.
In the case that you or your partner becomes bankrupt, incapacitated, guilty of a crime or passes away, the business can continue to operate without any legal disruptions. It is much easier to replace someone as a director of a company rather than the partners or owners.
Companies can also provide greater tax flexibility compared to individuals. As small business income belongs to the company, it is taxed at the corporate rate of 28.5 percent. Owners would pay a higher individual marginal tax rates if the company decided to pay them a dividend. In some circumstances a company doesn’t always provide greater tax flexibility as it doesn’t receive the same capital gains tax concessions as individuals.
A second strategy would to own the business through a trust, with a company as trustee and the owners and their families as beneficiaries. When set up correctly this strategy can provide a win-win outcome, as the trust provides the legal protection of a company while providing greatest flexibility to reduce tax and access capital gains tax concessions.
Trust structures can be substantially more expensive in start up costs when compared to a single company. Therefore this is not something to consider if the benefits are minimal.
Depending on how you set up a Company, Trust or other more complex tax structures, the cost will vary. A simple tax structure may cost from $2000+gst, plus a similar amount for your annual accounting fees (More complex tax structures can occur much higher fees).
Although these costs may sound like a lot, you should remember the potential benefits like saving money on not having to change structure further down the track.
A change of structure could see you being hit with thousands of dollars in legal fees to restructure loan agreements and paying even more in stamp duty. If this can be avoided, it should.
In most cases, it would usually be too late to change structures if your business were to encounter a law suit. In this worse case scenario your business and personal assets could be on the line.
If you are starting a small business with the intention of keeping it small, a company or trust isn’t always the best option. The key point here is to make sure you evaluate your options under the guidance of an accountant or professional with experience in the area you are delving into. The cheapest and easiest option at the time isn’t always the most beneficial. A small win now might cost you an even bigger loss in the future.
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.
August 16, 2017
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The information provided on this website, including the material and contents provided in the website publications, are informative in nature only and you should not act specifically on the basis of this information alone. It should not be used as a substitute for legal, business, accounting, tax, financial planning or other professional advice. If expert assistance is required, professional advice should be obtained.
Paul Baggetta is the Founder & Principal of Baggetta & Co. Paul Baggetta has been a Taxation Accountant since 1981, a Financial Planner since 1998, and in 1993 qualified as a Real Estate Licensee, holding a Triennial Certificate (currently not trading) and operated his own Real Estate business for property investment clients for over 5 years as a second business.
Financial planning services are provided by Paul Baggetta as an Authorised Representative (No. 261469) of Capstone Financial Planning Pty Ltd. ABN 24 093 733 969. Australian Financial Services License No. 223135.
Taxation & Accounting services are provided by Paul Baggetta as a Registered Tax Agent (No.61487008) and is a Member of SMSF Association, FIPA & NTAA.