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Business Advice

Choosing The Right Structure For Your Business

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Choosing the proper business structure is one of the most important decisions when setting up your business or expanding.

Starting on the right foot puts you in an excellent position to protect your assets, minimise tax obligations and reduce legal and operational risks. Providing a pathway for sustainable growth for any small business.

During uncertain economic times and recessions, you must have the correct structure to protect your business and support longevity. Knowing the different types of business structures will help you understand which one is right for your specific goals.

 

Four common business structures:

  • Sole Trader;
  • Partnership;
  • Company; or
  • Trust.

Sole Trader

The most common structure in Australia is the sole trader structure, the simplest business structure. As a Sole Trader, your business will be managed and operated under your name, making it easy to set up and much cheaper than other structures. 

However, operating as a Sole Trader will limit your business’s growth because it is not very flexible. Working as a Sole Trader also means your assets will be exposed in case of lawsuits, bankruptcy, or a relationship breakdown.

Partnership

This business structure is for two or more people who wish to create a business as a partnership. It’s pretty simple and cost-effective; however, there are several disadvantages. 

Each partner is liable for their share of the Partnership debt and that of other partners, even if they had no knowledge and were not responsible for the debt. Because of this, it is crucial that you consider who you enter a Partnership with and that there are clear agreements in place. 

Company

A Company structure is a separate legal entity, holding the same rights as a person, allowing it to incur debt, sue and be sued.

A Company structure is excellent if you plan to grow and scale your business. Individual shareholders can limit liability and won’t be liable for company debts. This reduces the risk when compared to other structures. 

If you’re the company’s sole Director, your assets are safe unless you, as the Director, have breached your duties under the Corporations Act. Often, the sole purpose of operating as a Company is to protect the family home (or other assets), even if the house is transferred to the spouse who is not the Director. 

A miniature business trading as a Company is taxed on profits at a flat rate of 25% if the turnover is less than $50m and 80% or less of their assessable income in that income year is ‘base rate entity’ passive income – that means income from company dividends (other than non-portfolio dividends), franking credits, non-share dividends, a trust, interest, royalties and rent.

An individual earning $112k pays the same tax as a Company. So when a business generates more than $112k, a Company structure can be beneficial in capping the tax the business pays. 

A Company structure also allows you to raise capital to help your business grow.

However, a Company attracts higher set-up and administrative costs, and it must follow the regulations of the Corporations Act and reporting requirements under ASIC. If you choose a company structure and go down the pathway of bringing on shareholders, you must have a shareholders’ agreement in place.

Trust

A business can be run inside a Trust structure, where a trustee carries out the business on behalf of the Trust’s members (or beneficiaries). The trustee can be an individual or a company, but putting this structure in place can be expensive and complicated. 

Trusts are generally used to protect the business asset for any beneficiaries, and it is up to the trustee to decide how profits will be distributed. This limits how a business’ profits can be used and may impact how you scale your business. Additional agreements may be needed depending on whether it is a Unit trust or run by a Corporate trustee. 

A trust can be structured in several different ways, which will decide how the entitlements are determined and distributed. Due to their complicated nature, it is best to seek professional advice when setting up a trust structure. 

Changing your business structure as you grow is possible, but this is often a complex and expensive process. If you begin your business with the most appropriate system in place for your needs, one that reflects your future goals and growth plans, you will be in a much better position.

How to Choose a Business Structure?

The hardest thing about selecting a business structure is that you need to consider the long-term goals of your business. This includes: 

  • The type of business you are starting 
  • The risk profile of that business
  • Who will be involved in your business?
  • What is your overall plan for growth?
  • Your access to capital ahead of the launch 

Each structure requires different costs and commitments whilst promoting different levels of growth. There are also tax considerations to factor into your decision. 

For example – The Sole Trader structure sees profits as personal income and will be taxed. If you have set your business up in a Company structure, you will pay a set amount on your income, but everything will need to be lodged with the ATO and through ASIC. A Trust structure again uses a different tax system, which may allow you to plan for lower tax rates. 

Choosing the proper structure for your business will significantly impact your operational and legal risks, asset protection and tax obligations. It’s a big decision to make, and it’s best to consult with a professional before selecting a structure to ensure you are making the right one for your long-term plans. 

We can advise you on the best structure for your business and personal circumstances to ensure protection and scalability. 

Contact Clout Advisory today at 1300 886 006 to discuss your business structure and start your journey on the right foot. 

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