Choose a Structure for your Business
Choosing the structure that your business will operate under is one of the most important decision you will make. It has serious implications on your financial tax and administrative burdens both during the businesses life and on its termination.
In order to determine the appropriate structure it is important that you have a clear objective of your ultimate business venture and are fully versed on all the , produce quality products or services, understand their market, manage their money properly and are good employers. They also keep quality records and have a close relationship with their accountant. When establishing your business it's important to seek sound professional advice from qualified accounting and legal sources.
How FinServCo can help
We are not your average accounting firm that just keeps the score. Our clients enjoy a 'business coach' relationship and we work on your business to develop strategies, systems and processes to ensure your marketing generates a better return and repeat business. We use tools and techniques to monitor sales, productivity and make your financials more meaningful.
Your business success is important to us because Small Business is Our Passion.
All businesses, regardless of
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Choice of Structure
You have a choice of four separate structures when determining how to establish your business:
1. Sold Trader
2. Partnership
3. Company
4. Trust
5. Combination of the above
The structure you choose depends on your personal circumstances. However it is very important to get the structure correct at the outset.
Some of the things that you will need to consider include:
- Costs associated with establishing and running the business
- protection of your assets/capital from creditors
- division of wealth from marriage breakdown
- estate planning considerations
- ability to distribute income and losses to your family members
- tax payable and deductions available under different structures
The short section below described some of the key characteristics of each particular structure. However it is important to consult a qualified accountant before to formally establish any structure.
Key Characteristics
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1. Sole Trader
The purpose of establishing your business as a Sole trader is both the ease of the structure and the fact that you get to keep all the income and capital gains you derive.
However being a sole trader means you are personally liable for all the debts of the business and your personal assets can be used to cover these debts.
A Sole Trader uses their individual tax file number and lodges an annual income tax return and quarterly, monthly, annual BAS statements if registered for GST.
Key Characteristics
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2. Partnership
as with a Sole trader, a partnership is merely a conduit for distributing income and is not a separate legal entity. Under income tax law a partnership can exists when you are in receipt of joint income.
You first thing you will need to do is to enter into a formal partnership agreement that will dictate how profits (or losses) are to be split amongst the partners. Once a partner leaves or a new partner joins the agreement ceases and a new partnership comes into existence
You will need a partnership tax file number but its the partners in their individual capacity that pay tax on the partnership profits & losses. Partners are not employees of the partnership and consequently the partnership does not attract a deductible salary expense and cannot claim superannuation contributions made on behalf of the partners.
Key Characteristics
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3. Company
When setting up a private company shares are issued to the shareholders who are the owners of the company. Unlike a sole trader / partnership a company is a separate legal entity and will have its own tax file number, Australian business number and at least one public officer. The company can carry on business in its own right, own assets, can sue and be sued.
An annual tax return is due whereby the company self assess the tax payable at the company tax rate of 30%.
The clear attraction of a company is the ability to protect your personal assets from creditors by benefiting from the limited liability of the company structure.
It is important to understand the additional obligations that owning a company bring due to the fact that there is now a separate legal entity involved. This attracts some important tax consequences, in particular:
- a private company must satisfy the 50% continuity ownership test to access carry forward losses.
- Loans and payments made by a private company to shareholders may be deemed unfranked dividends unless the company enters into a commercial loan agreement prior to lodging the tax return.
Key Characteristics
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4. Trusts
A trust structure is another conduit mechanism similar to a sole trader / partnership with the main exceptions being that the trustee (person in control) can distribute the income to the beneficiaries who stand to benefit from the trust. This is useful for distributing income between family members. A trust will need a tax file number and file an annual trust return. However the trust is not liable for tax on income. As with a partnership the tax is assessed in the hands of the beneficiaries should the trustee have distributed any to them. The income is taxed in the same form as it was earned by the trust (e.g capital gains). However unlike a partnership and like a company, trust losses are retained din the trust and cannot be distributed.
As with a company the trustees assets may be protected from creditors if appropriately structured and the trustees can have use of the trusts assets without actually owning them.
