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There is no ‘one size fits all’ approach to choosing a business structure. Amongst other matters for discussion, there is the consideration of asset protection, taxation and succession planning.
Essentially there are four business structures: - Sole Trader
- Partnership
- Company
- Trusts
Before acting on your decisions always obtain good professional advice specific to your own situation and ambitions. The following provides general guidelines to help you along the way.
Registrations
Regardless of structure, any business needs to be registered with the:
- Australian Business Register
- Australian Taxation Office
- Department of Fair Trading
Also, check with your Office of State Revenue because some may also have to be registered for Land Tax and Payroll Tax.
Structures
Sole Trader
A sole trader is the most basic form of business structure. The sole trader is personally responsible for all the obligations and debts of the business and business net income is taxed at personal marginal rates. Unless your business and intentions are likely to remain ‘small’, being a sole trader has limited value.
Advantages:
- No formalities to establish.
- You have sole control of the business and assets.
- Business losses can be subtracted from other personal income.
Disadvantages:
- Sole responsibility.
- Unlimited liability. (all your personal assets are at risk)
- Business income added to your personal income.
- Income is taxed at your marginal rate and subject to PAYG instalments.
- You cannot bring in a partner without capital gains tax consequences.
- Succession planning is only available through sale of business.
Partnership
A partnership is now an outmoded form of business structure and is losing relevance as an efficient vehicle to ‘house’ an operating business.
Advantages: - Very simple partnerships (such as a couple) do not necessarily require a partnership agreement.
- Responsibility can be shared between partners.
- Wider skills base potentially available.
- Income is split between partners, allowing two or more tax-free thresholds.
- Business losses can be subtracted from personal income.
- If it is written into the partnership agreement, a partner who does not participate in management can have his or her liability limited.
Disadvantages:
- A partnership agreement must be drawn up for all but the simplest family partnerships.
- Unlimited liability for general (non-limited) partners.
- Each general partner is liable for acts of negligence or wrongful acts of other partners.
- Share of business income added to personal income.
- Income is taxed at your marginal rate and subject to PAYG instalments.
- Winding up or changing the partnership can have capital gains tax consequences.
- Succession planning is difficult.
Company
A company is generally the most flexible of business structures as it allows for growth and the ‘seamless’ introduction or departure of stakeholders. However, a company structure also incurs obligations so don’t consider one if you’re not professional about your business.
Advantages: - Limited liability of members.
- Profit can be retained in the company, taxed at the company rate (currently 30%).
- Profits can be shared as salaries, fringe benefits, superannuation or dividends; in a tax effective manner.
- Shares are transferable.
- The process of raising extra capital is easier.
- Management can be kept separate from ownership.
- Succession planning is easy.
Disadvantages:
- Requires registration with Australian Securities and Investments Commission.
- Suppliers and lenders can demand directors’ guarantees, negating limited liability.
- Directors can be held liable if the company trades whilst insolvent.
- Directors can be liable for certain taxation debts.
- Most capital gains tax concessions are not available.
- Losses cannot be shared with members.
- There are restrictions on loans to members.
- There are restrictions on deducting prior year losses.
- Winding up has tax consequences.
Unit Trust
A unit trust is only appropriate in certain circumstances and can be clumsy. Ensure you have detailed advice if you are considering this option.
Advantages: - Profits can be shared as salaries, fringe benefits, superannuation or distributed in proportion to unit holding.
- Units are transferable.
- Raising extra capital is simple (in theory).
- Succession planning is easy.
- Capital gains can be distributed tax effectively.
Disadvantages:
- Needs a company to act as trustee and a trust deed.
- Unit-holders can be held liable for business losses.
- Profits retained in the unit trust are taxed at penalty rates, currently 45% (2007).
- Losses cannot be distributed.
- There are restrictions on loans to unit-holders.
- There are restrictions on deducting prior year losses.
- Winding up has tax consequences.
Discretionary Trust
A discretionary trust is only appropriate for a family business and any family rift will create problems.
Advantages: - Profits can be shared as salaries, fringe benefits, superannuation or distributed to beneficiaries named in the trust deed.
- Capital gains can be distributed tax effectively.
- Beneficiaries are usually not liable for trust losses.
Disadvantages:
- Needs a company to act as trustee and a trust deed.
- Profits retained in the trust are taxed at penalty rates, currently 45% (2007).
- Losses cannot be distributed.
- There are restrictions on loans to beneficiaries.
- There are restrictions on deducting prior year losses.
- Succession planning is difficult.
- Winding up or changing the trust deed has tax consequences.
by Virginia Bowe PNA, Andersen Bowe Pty Ltd Virginia Bowe is an Accredited Professional National Accountant and has her own practice within the corporate structure of Andersen Bowe Pty Ltd. Virginia’s wealth of knowledge and expertise in the industry has provided her with a very clear overview of the quirks, pitfalls and opportunities associated with small and medium business ventures. source: http://www.womensnetwork.com.au
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