The Best Fit: Which Structure Is Right For My
Business?
Starting a business can be confusing. There are a lot of things to consider – from your Business Name to your product or service offering to which business structure is the right choice for you.
Now, if you’re not accounting minded or have never run a business before, the thought of choosing a business structure might make you want to close your laptop and come back tomorrow. But don’t, because we’ve broken it down to make it as simple as possible.
So how do you know which Structure to choose? Let’s take a look.
Option 1: Sole Trader
This is the simplest business structure. As a sole trader, you have full control of your assets and business decisions. It’s cost effective to set-up and allows you to use your individual tax file number to lodge returns. Some more elements to consider about sole traders:
- Simple to setup and operate
- Full control of your assets and business decisions
- Does not require a separate bank account (though we would recommend it). Speak with us to find out why.
- Unlimited liability meaning all your personal assets are at risk
- Inability to split profits or losses between family members
- Personal liability to pay tax on derived income
Financial Destress Tip: Sole trader structure is often a good fit for operating a simple business in a low risk industry.
Option 2: Company
A company is defined as an independent legal entity. As a company owner, you will run the business as a director and own the business as a shareholder. A company has the same rights as a natural person and can incur debts, sue and be sued. Some further elements to consider about setting up a company are:
- Company members have limited liability
- Separate legal entity
- Wider access to capital – great for R&D!
- Money earned belongs to the company
- Higher setup and running costs than other structures
- Requires an annual company tax return to be lodged with the ATO
- Also requires the completion of annual review (which occurs a fee)
Financial Destress Tip: A company is a great choice when you are looking to grow your business and be more protected.
Option 3: Partnership
As the name implies, a partnership is a business structure made up of two or more people who distribute losses between themselves. There are three main types of partnership – General Partnership, Limited Partnership and Incorporated Limited Partnership.
An important note here is that in a General Partnership, both partners have unlimited liability. However, in a Limited Partnership there is always at least one partner who has unlimited liability, increasing potential risk. Our team can guide you through the different partnership options over the phone, on Zoom or in person.
If you’re considering setting up a partnership structure, the following is important to consider. Partnerships:
- Inexpensive and relatively simple to setup
- Require minimal reporting
- Must apply for and use an ABN
- Don’t pay income tax on the income earned. Instead, each partner pays tax on the share of the net partnership income each receives.
- Are required to lodge a partnership tax return with the ATO each year
- Must register for GST if turnover is $75,000 or more per year.
Financial Destress Tip: A partnership could be considered when going into business with other people. However, assessing the risk of liability should first occur here.
Option 4: Trust
Lucky last – Trusts! Put simply, a trust is an obligation imposed on a person. If you operate your business as a trust, be aware that the trustee is legally responsible for its operations.
If you think this is the option for you, keep in mind that trust structures:
- Offer good protection of the business assets
- Allow for tax effective distribution of income earned by the trust to beneficiaries
- Are often expensive to setup and operate
- Require a formal trust deed that outlines how the trust operates
- Require the trustee to undertake annual administrative tasks
Financial Destress Tip: A trust is great as an extra layer of protection for business assets, reducing liability and allowing for the spread of income across a number of individuals or other entities. If you operate in a high-risk industry or require extra protection of business assets this could be the choice for you.
Next Steps
If you’re starting a business, it’s always good to have a conversation with someone who knows the ins and outs of business structures. It’s a decision that’s important to get right. We would love to help set you on the right path!
If you’re thinking of restructuring your business, let us take the pressure and help. We can manage the transition and limit the stress on you.
To speak with our team, click here.