Choosing the right structure when you’re first starting out can help you define your business practices and procedures, your compliance requirements as well as protect your assets and ensure you are being tax-effective. Getting it right at the beginning can help you avoid difficult, costly and time-consuming changes in the future in the event of any disputes or issues.
There are four main types of structure you can set up when starting a business – sole trader, a partnership, a company or a trust. Each of the varying structures have different regulatory requirements, different costs and may even affect the amount of tax that you pay. With this in mind, if you are considering setting up a business, it is a good idea to get the advice and assistance from an accountant who will be able to recommend the right structure for you.
If you are going into business by yourself, and intend to run it on your own, then setting up as a sole trader may be the right structure for you. This is one of the simplest forms of business you can start, and as such, has some of the lowest costs associated with its formation as well as the least legal and tax requirements. As an example, as a sole trader you are taxed as an individual, with your business income being declared on your personal tax return. This can be a very attractive idea for many people who want to be able to run a business without having to pay tax at business rates, or having to pay extra costs such as payroll tax or superannuation contributions. It is also a relatively easy structure to close down if you wish to wind up the enterprise or to change if you wish to modify its structure. On the flip side, being the sole owner and manager of your enterprise means that you and your personal assets are completely at risk if things go wrong.
If you are planning to go into business with one or more other people, then a partnership structure may be a good option. A partnership is essentially an association of people who share the management of the business. Also remember that while the income is shared between you and your partners, any debts or losses will also be equally shared between them. A partnership does not pay income tax on its revenue, instead you and your partners will each pay tax on the income you receive from the business.
It is always a good idea if you are setting up a partnership to consider a formal partnership agreement (although this is not mandatory). This way all responsibilities, liabilities and any other critical information about the business can be agreed upon and formally acknowledged. Again, because this structure is fairly simple, it is inexpensive to set up and maintain.
Proprietary Limited Company
A proprietary limited company (also known as a PTY company) is one of the most common structures of small businesses in Australia. A PTY company is a legal entity on its own, separate from its owners, managers or shareholders. Unlike sole traders and partnerships, the income from a PTY company belongs to the business, it must lodge an annual company tax return and it will pay income tax on its assessable profits at the company tax rate. PTY companies have many regulatory, financial and legal requirements. As more complex structures they are also are harder to wind up, are more expensive to set up and maintain. Their advantages, however, include the fact that the liability of shareholders is restricted, and their personal assets are not under risk in the event of losses or debts. Directors and shareholders of the company can also be employed by the business and be paid a normal income that is then taxed at personal rates.
Out of all the business structures, a trust is undoubtedly the most complex to set up and maintain. A trust is essentially a business that is set up to hold assets for the benefit of others – the beneficiaries. The trust must have a trustee (who can be a company), and they are legally responsible for its management. It must also have a formal deed to operate and has onerous annual reporting and compliance requirements. Trusts have been popular in the past for their numerous tax benefits – including the ability to “stream” dividends and interest from the trust into a company beneficiary (taxed at the company rate of 30%) or to “stream” capital gains to individuals so they can take advantage of the significant capital gains tax discount – however with ever-changing regulations and tax rules they have recently lost a little appeal as a business structure.
To find out what structure will suit you and your business contact us here.