Which Business Structure is right
for your business?
Australian Business Structures
The structure of your business significantly influences your overall tax position, and therefore, it is in your best interest to choose a structure that efficiently minimises your tax burden, whilst maximising your business value and growth potential.
Well considered business structure planning and implementation can positively impact the long term outcomes of both business and personal wealth creation.
Other Business Services
Types of Business Structures
The four main types of business structures commonly used by small to medium business owners are:
A sole trader business structure is the simplest business structure. It is easy and inexpensive to set up, and it can employ people. Under a sole trader structure the individual business owner generally makes all the decisions and will be legally responsible for all aspects of the business, including debts and liability.
A Partnership business structure is an association of people or entities carrying on a business together.
A Partnership which involves a minimum of 2 or more individuals is similar to the sole trader business structure in that the individual partner owners are legally responsible for all aspects of the business. There is no asset protection as each partner is personally liable. A partnership between individuals is not a legal entity. A partnership agreement between individuals is not essential, but strongly recommended.
A Partnership can involve legal entities, eg two Pty Ltd Companies or two Family Trusts, and is more expensive to set up and operate. Operating a partnership between Companies or Trusts is very complex, especially if each Trust has a Corporate Trustee. Therefore, a formal partnership agreement is crucial for partnerships between legal structures.
There are noteworthy benefits of a partnership involving legal entities, including asset protection, tax advantages and employment benefits.
The benefits of setting up a Trust are many, with the most beneficial and popular reasons being that it can help you protect your assets when being used as an investment vehicle for property investments and assets, and when it is used to run a business.
Setting up a Trust to only manage your property and assets, and not run a business under it, allows a family group to safeguard their collective assets, provides tax benefits, protects the assets under the Trust from individual liability, and secures the funds of the Trust so they can be easily passed on to future generations.
Operating a business under a Trust structure is where a trustee carries out the business on behalf of the beneficiaries and/or the members of the Trust. The trustee is legally liable for the debts of the trust, and the trustee can use the assets of the Trust to meet all financial obligations of the Trust.
The two types of Trusts that you can operate a business under are a Discretionary Trust, commonly referred to as a Family Trust, and a Unit Trust.
Discretionary Trust (Family Trust)
The benefits of a Discretionary (Family) Trust include the Trustee having discretion over what income or capital is distributed to which beneficiary, and entitlements to discounts on Capital Gains on the disposal of assets held for more than 12 month. Discretionary Trusts can be particularly suitable for a family business.
When two or more non-related individuals operate a business, a Unit Trust is more common as it divides the trust property into fixed and quantifiable parts called ‘units’. Beneficiaries of a unit trust subscribe to units in a similar way to shareholders subscribing to shares in a Company.
Individual Trustees are not the only Trustee option.
The trustee of a Trust can also be a Registered Company, often incorporated for the sole purpose of acting as Trustee. The Company does not operate the Trust, it is the Directors of the corporate trustee that ultimately operate the Trust.
A Trust with a Corporate Trustee is more expensive and time consuming. However there are many substantial benefits to setting up a Corporate Trustee structure.
A Corporate Trustee can be a popular and beneficial choice for Self Managed Super Funds.
A Company business structure is an independent legal entity run by directors and owned by shareholders, and it is the most common structure for businesses in Australia. A Pty Ltd Company is well suited for businesses:
- with multiple employees
- with multiple Owners
- looking to achieve high growth
- looking to scale their business over time
- wanting to bring additional business owners or investors on board at any time
The option is also available for a Company to be set up as a one man Company with an individual as a sole director and at least one shareholder.
A Company is a separate legal entity that has the same rights as a natural person. It can incur debt, sue and be sued. It is a complex business structure with greater reporting requirements and obligations than any other business structure.
Before deciding on a Company business structure, it is important to seek professional advice from a business advisor or accountant to ensure this structure meets your personal circumstances and business objectives.
Factors to consider when starting your business
Your choice of structure will have a significant impact on crucial areas of your new business, and can determine the outcomes of:
- The licenses you will require
- How much tax you will be liable to pay
- Whether you are considered an employee, or the owner of the business
- Your potential personal liability and asset protection
- How much control you will have over the business
- Set up costs, ongoing costs and volume of paper work required for the business
Your choice of business structure is a critical business decision, and the foundation stone to setting up your business. Each business structure has its own set of rules and regulations, and before you decide on your business structure – connect with a business advisor or tax accountant for guidance, advice and support.
Consequences of setting up the wrong business structure
Some of the consequences of setting up the wrong business structure include:
- Little or no protection of assets held by the individuals or the business
- Lost access to available Government grants and incentives
- Business ownership transfer difficulties in the event of death, retirement or disability
- Limited or no tax planning and tax reduction strategies
- Foregoing succession and estate planning opportunities
- Reducing the sale value of your business
- Issues arising from being unacceptable to licensing authorities
- Inability or difficulties bringing on new partners and/or investors
A business advisor or tax accountant will help you consider many of the relevant matters, including your personal position and your business intentions, to help you select the correct business structure.
When to Review your Business Structure
Initially when you commenced your business, the legal structure you chose to operate under may have been weighted by factors such as costs, size, and possible longevity of the business. However, over time as your business changes and grows, consideration should be given to whether the business structure you started with remains the most appropriate legal structure for your business.
An established business, undergoing significant changes and/or growth, should review their current business structure.
Seek professional advice from a business advisor and tax accountant as there will be strategic factors and regulations to consider.