Choosing Your Business Structure
Save on Tax. Protect Your Assets.
Business structures are one of the first considerations when forming a company, however choosing an unsuitable structure can lead to higher taxes and unforeseen personal liabilities. That is why Oyster Hub Accountants can help you choose the right structure for your use case. Book a discovery call and talk to us today.
Why Choosing a Right Business Structure in Important for Your Business?
One of the key decisions you’ll make when starting a business is its structure. Your choice of structure will depend on the size and type of business, your personal circumstances and how much you plan to grow the business. You can change your business structure as your business grows or your circumstances change.
Your business structure can determine your:
Saving on High Tax Liabilities
Responsibilities as a Business Owner
Potential Personal Liability
Your Asset Protection
Ongoing Costs and the Volume of Required Paperwork.
How Wrong Business Structures Can Cost You Millions !
High Tax Liabilities
Once you know your business structure, forecasting your business cash flow facilitates in your ability to offset uncertainty by predicting peaks and troughs in your businesses cash flow. The purpose of the forecast is to highlight cycles in your business and predict your cash flow on a monthly basis.
Risk as Business Owner
As a business owner you may not know the correct business structure for you at that point in time. Hence by making this decision on your own without any specialist guidance could lead you down an unwarranted pathway and put you face on with significant risks.
Personal Assets Risk
Ensuring you have the correct business structure can enable you to limit putting your personal assets at risk rather actually protecting them against any risks. For more information and to accurately decipher how to do this book your free business structure advice call!
Launch your business
Once you have taken advice from your personal accountant, mortgage broker or business coach relating to the structure to set up your business you will now be able to launch your business entirely. This will enable you now to focus on how to optimise the benefits of your chosen business structure.
6 common business structure mistakes to Avoid
Mistake 1
Operating as a Sole Trader or Partnership & holding personal assets under the same name.
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Mistake 2
When the company shares are held in an individual's name whilst trading as a company.
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Mistake 3
Having your business and personal assets under one umbrella.
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Mistake 4
When family members are not earning more than you yet operating under a sole trader or partnership.
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Mistake 5
Purchasing high capital growth assets such as investment properties when running your business in a company structure.
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Mistake 6
Not considering succession plans or estate planning options when operating as a sole trader or under a partnership.
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FAQ - Common Business Structures
Learn advantages and disadvantages of each different business structure and work out which structure best suits your needs.The most common types of business structures in Australia are:
A sole trader is the simplest form of business structure and is relatively easy and inexpensive to set up. As a sole trader you will be legally responsible for all aspects of the business. You’ll generally make all the decisions about starting and running your business and you can employ people.
Advantages
- Simple to set up and operate.
- You retain complete control of your assets and business decisions.
- Fewer reporting requirements.
- Any losses incurred by your business activities may be offset against other income, such as your investment income or wages (subject to certain conditions).
- Allows you to use your individual tax file number (TFN) to lodge tax returns.
- You are not considered an employee of your own business and therefore don’t pay payroll tax, superannuation or workers’ compensation on income you draw from the business.
- Relatively easy to change business structure if your business grows or if you wish to wind things up.
Disadvantages
- Unlimited liability which means all your personal assets are at risk if things go wrong.
- Little opportunity for tax planning – you can’t split business profits or losses with family members and you are personally liable to pay tax on all the income from the business.
Other factors to consider
Business name
You don’t have to register a business name if you use your own name. If you choose not to use your own name you will need to register a business name with the Australian Securities and Investments Commission.
You will need to get an Australian Business Number (ABN) before applying to register a business name. It is free to apply online for an ABN with the Australian Business Register.
TIP: Before choosing a business name check its availability as a trademark, business name and domain name (your website address). If the name is already registered by someone else as a trademark in Australia, in a class relevant to your business you’d be wise to choose another name. If you register the name as a trademark in relevant classes, this may give you exclusive rights to that name in those classes. Registering only as a business name, company name or domain name doesn’t give you the same type of exclusive rights
Tax requirements
Sole traders are taxed as individuals and pay income tax at personal rates.
You will need to register your business for goods and services tax (GST) if your annual turnover is expected to be more than $75,000.
For more information regarding tax obligations for sole traders visit the ATO website.
Insurance
A sole trader is responsible for the liabilities of the business. Liability is unlimited and includes all personal assets, including any assets jointly-owned with another person, such as a house.
You are also not covered by workers’ compensation should you injure yourself at work. This may result in a loss of income if you cannot work and you may still be required to pay any expenses for your business, such as loan repayments.
A partnership involves two or more people (up to 20, with some exceptions) going into business together with a view to making a profit. In Western Australia, partnerships are governed by the Partnership Act 1895.
There are two types of partnership – general and limited.
A general partnership is where all partners participate to some extent in the day-to-day management of the business.
A limited partnership is one formed by up to 20 people. It has at least one general partner who controls the company’s day-to-day operations and is personally liable for business debts, and passive partners called limited partners.
A limited partner contributes a defined amount of capital to the business, but is generally not liable for its debts or obligations. The Department of Mines, Industry Regulation and Safety has administrative responsibility for theLimited Partnerships Act 1909 in Western Australia.
Advantages
- Simple and inexpensive to set up.
- Minimal reporting requirements.
- Shared control and management with other partners.
- A partner’s share of the business’s tax losses may be offset against other personal income, subject to certain conditions.
- More opportunities for tax planning (such as income splitting between family members) than that of a sole trader.
- Relatively easy to dissolve the partnership or to resign and recover your share.
- Partners are not employees. Superannuation contributions and workers’ compensation insurance are not payable for partners.
Disadvantages
- A partnership is not a separate legal entity. Each partner is fully responsible for debts and liabilities incurred on behalf of the business by other partners – with or without their knowledge.
- Potential for disputes over profit sharing, administrative control and business direction.
- Changes of ownership can be difficult and generally requires a new partnership to be established.
Other factors to consider
Partnership agreement
Before entering into a partnership it is advisable to have a lawyer prepare a formal agreement outlining:
- each partner’s role and level of authority
- each partner’s financial contribution
- a procedure for resolving disputes
- a procedure for ending or resigning from the partnership.
It is important to have a formal agreement because personal liability is unlimited for each partner.
You will be held liable for any shortfall if the business fails and a partner can’t afford to pay their share of any debts. You are also jointly responsible for any debts your partner incurs on behalf of the business, with or without your knowledge.
If there is no agreement in place, each partner is deemed to own equal shares of each asset.
For more information read our publication: Partners in business
Tax requirements
A partnership doesn’t pay tax on its income. Instead, each partner pays tax on the share of net partnership income each receives.
TIP: A formal partnership agreement is an important tax document if profits and losses are not distributed equally amongst the partners.
A company is a separate legal entity and can incur debt, sue and be sued. The company’s shareholders (the owners) can limit their personal liability and are generally not responsible for company debts.
A company is a complex business structure and has high set-up and reporting costs. You can form a company as either a private (also known as proprietary) or public entity.
A registered company must have at least one director (and a company secretary unless it is a private company). A director is responsible for managing the company’s business activities.
To become a company, an entity must:
- be incorporated under the Corporations Act 2001
- be registered with the Australian Securities and Investment Commission (ASIC).
Advantages
- Limited liability for shareholders.
- Well understood and accepted structure.
- Able to raise significant capital.
- Can carry forward losses indefinitely to offset against future profits.
- Easy to sell and pass on ownership.
- Profits can be reinvested in the company or paid to the shareholders as dividends.
Disadvantages
- Significant set-up and maintenance costs.
- Do not retain complete control.
- Complex reporting requirements.
- Can’t distribute losses to its shareholders.
Other factors to consider
Tax requirements
The tax requirements for a company are different to those of other business structures. A company pays income tax on its income (or profits) at the company tax rate. There is no tax-free threshold for companies and tax is paid on every dollar earned.
Legal requirements
Company officers and directors have legal obligations that specify how they perform their duties and manage the company’s affairs. These obligations are outlined in the Corporations Act 2001.
A trust is a structure where a trustee carries out the business on behalf of the trust’s members (or beneficiaries). A trust is not a separate legal entity.
A trustee may be an individual or a company. The trustee is legally liable for the debts of the trust and may use its assets to meet those debts. However, if there is a shortfall the trustee is responsible for the difference.
A trust is set up through a trust deed and there are two main types: discretionary or unit trusts.
In a discretionary trust, the trustee has discretion in the distribution of funds to each beneficiary. In a unit trust, the interest in the trust is divided into units with their distribution determined by the number of units held by each member.
Advantages
- Reduced liability especially if corporate trustee.
- Assets are protected.
- Flexibility of asset and income distribution.
Disadvantages
- Can be expensive and complex to establish and administer.
- Difficult to dissolve, dismantle, or make changes once established particularly where children are involved.
- Any profits retained to reinvest into the business will incur penalty tax rates.
- Can’t distribute losses, only profits.
Other factors to consider
Tax requirements
A trustee must apply for a tax file number (TFN) and lodge an annual trust return. The trust is not liable to pay tax. Instead tax is assessed to the trustee or the beneficiaries that are entitled to receive the trust net income.
A co-operative is a member-owned business structure with at least five members, all of whom have equal voting rights regardless of their level of involvement or investment. All members are expected to help run the cooperative.
A co-operative is a separate legal entity and members, directors, managers and employees are not liable for any debts incurred unless they are the result of recklessness, negligence or fraud.
A co-operative usually only allows a limited distribution of profits to members (some don’t allow any). This business structure encourages a democratic style of management and promotes the concepts of sharing resources and delegation to increase competitiveness.
In Western Australia, co-operatives must comply with the requirements of the Co-operatives Act 2009 (which was amended effective 1 January 2017) and be registered with the Consumer Protection division of the Department of Mines, Industry Regulation and Safety.
Advantages
- Generally inexpensive to register.
- All members must be active in the co-operative.
- Members have an equal vote at general meetings regardless of their level of investment or involvement.
- Other than directors, members can be aged under 18 years. These members cannot stand for office and don’t have voting rights.
Disadvantages
- As co-operatives are formed to provide a service to members rather than a return on investment, it may be difficult to attract potential members seeking a financial return.
- There is usually limited distribution of profits to members and some co-operatives may prohibit the distribution of any surplus.
- Members providing greater involvement or investment than others will still only get one vote.
- Requires ongoing education programs for members.
There is no best structure, because it all depends on the circumstances on which the company is formed and its projected growth. At Oyster Hub we consider all considerations when advising our customers on the most suitable structure for their business.
More information about the differences between business structures can be found on ASICS setting up a business structure site.