When starting a business, the first consideration is generally how you are going to operate it, using one of the four most common business structures in Australia. While it may seem like a simple question, the structure of your business will impact on the tax you pay and your obligations. The four main business structures in Australia are: 1. Sole trader 2. Partnership 3. Company 4. Trust. Each structure serves different purposes. But no one is better than another; each one has its own merits, disadvantages and responsibilities you’ll need to address. As your business grows, the business structure you originally chose may no longer be appropriate and you may need to restructure. For example, you may change your business entity type from a trust to a company, introduce additional entities, or reorganise your existing group. You may need to restructure for reasons such as asset protection, introduction of new business partners or changes in your business model.
So, whether you are a new business owner or an established business whose circumstances have changed, here are the key pros and cons of the main business structures used in Australia:
How do I earn income?
The first thing to consider is whether you are earning personal services income (PSI). If the bulk of your income is PSI, it generally needs to be attributed to the individuals who earned the income and factored into their individual tax return rather than as business income. The implication of this rule is that any tax benefit resulting from business structure may be made irrelevant in relation to the PSI income. The Australian Taxation Office provides guidance on whether you are caught under this.
Working by yourself
A sole trader is the simplest business structure and provides a tax benefit in the form of the ability to offset business expenses against business income. Unfortunately, from a tax standpoint, the business’s income is taxed at the individual tax rates, which could be as high as nearly 50 per cent. While a sole trader can also employ staff, the key benefit for many first-time business owners who plan to work alone is the ease of set-up for the business (registration for an ABN is really the only requirement) and the low tax rate (as little as zero per cent) if the business earns minimal income during start-up. Superannuation contributions for sole traders to themselves are also an option rather than an obligation. If you plan to become a sole trader, you need to register for an ABN with the ATO. If you wish to work under your own name, you won’t even need to register a business name.
Working with others
If you plan to go into business with one or more other individuals, you may wish to consider a partnership. Members of a partnership report their portion of the partnership income on their personal tax returns (the partnership doesn’t pay tax; although it is required to file a tax return with the ATO for administrative purposes). The creation of a partnership does however allow you generate more capital than starting a business as a sole trader, as each partner will normally “buy-in” to the partnership. Set-up is simple in that a partnership commonly requires a partnership deed, which is an agreement between the partners detailing the rights and obligations of the partners, although a partnership can also be established as a result of the conduct of the partners despite a lack of an oral or written agreement.
Is a trust for me?
While a trust structure is more expensive and complex to set up, it can be cheaper and easier to set up than a company. A discretionary trust allows for the trustee to distribute to beneficiaries to effectively minimise tax. A trust is also eligible for the 50 per cent capital gains concession where a company is not. Ownership and control of trust property resides with the trustee, while the beneficiary is the individual or individuals who benefit from the trust. It is recommended that you discuss your options with us before setting up a Trust. It is just one of the services we provide.
Should I have a company?
A company is your traditional structure to set up. A company is owned by shareholders, with the Directors making decisions regarding the business on behalf of the shareholders. A company needs to have a constitution created and registered with ASIC before trading. There is no tax-free threshold, but it does pay a flat 27.5 or 30 per cent tax on every dollar of profit. It is also an appropriate entity for personal asset protection. A company can also distribute profits through dividends with franking credits attached.
By working closely with you, the team at Rubiix will get to know your business intimately, together with the challenges you face. Through our knowledge and planning we can help you identify any tax implications for your business and maximise any available tax benefits or available restructuring opportunities. It’s often a challenging, uncertain time, but with a plan aligned to your strategy, commitment to flexibility, and communication, you can give your business a chance at survival and return to profitability.
For more information about how we can help you restructure your business please contact our office today.