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What’s the Big Deal About Business Structures?

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What’s the Big Deal About Business Structures?

Without a doubt the single most common and completely avoidable mistake I see all the time is having the wrong business structure. If you’ve already set up your business keep reading so you can identify if your foundations are a little shaky, and then speak to your accountant about how to fix them – because they can be fixed, and the sooner the better.

If you’re new to business, this will be one of the best articles you will ever read because it will give you a solid understanding of the differences between structures, what you need to do, what you need to ask about and where to go to get help.

WHY DO BUSINESS STRUCTURES MATTER?

There are a lot reasons why structure matters. you could be paying too much tax, you could be accepting too much personal responsibility as a business owner, your personal assets may be at risk, you could be paying too much for compliance and accounting, you could be unnecessarily overcomplicating your life. That’s just to mention a few … and trust me – there are many, many more.

WHAT OPTIONS ARE THERE?

So what are the options when it comes to structuring your business?

There are basically four main structures to consider:

  1. Sole trader
  2. Company
  3. Trust
  4. Partnership

Each has advantages and disadvantages. Which one is right for you will depend on issues such as the size and revenue of your business, your plans for the future, your personal circumstances, your personal and business assets, and much more. So, let’s have a brief look at what each structure means.

1. Sole trader

A sole trader means that you and your business are one and the same in both the legal and tax sense, and if you die your business dies too. You and your business have the same ABN and tax file number and you will most probably trade with a registered business name, though you are also able to trade with your own name if you wish. This is the simplest and cheapest type of business to start, run and close down.

2. Company

A company is a common structure, and it usually has ‘Pty Ltd’ at the end of the business name. The ‘Pty’ means it is an incorporated entity, not a sole trader, and ‘Ltd’ means that the company’s liability for its debts is limited up to the value of the shareholders’ shares or equity. A company is a separate legal and tax entity from the owners, and has its own identity completely separate to its owners. The key here is that a company is not you. If you die, the company lives on, as does its obligations.

3. Trust

Trusts come in various different types, but the common two are unit trusts and discretionary trusts, which are usually family trusts. Trusts are a complicated structure and have their own set of rules. Trusts are often favoured because you can split income between beneficiaries,

but there are some strict rules around this and I’ve found that the circumstances where this can be done legally aren’t as straightforward as people seem to think.

Another reason trusts are often used is for additional asset protection, however for some businesses trusts can be overkill and provide no benefit other than to increase your financial complexity, and hence by their very nature increase your compliance and accountant fees. My pet hate of trusts is that profits must be distributed at the end of the year, which means that for many people they are paying personal income tax on profits that they haven’t actually received any money for yet.

4. Partnership

A partnership can be between individuals, companies or trusts, or any combination of those. The main difference with a partnership is that it is not actually a legal entity in its own right, but it does require its own ABN and tax file number, and although it doesn’t pay its own tax it still needs to lodge a tax return.

SO, WHICH STRUCTURE IS RIGHT FOR ME?

Unfortunately, there is no real rule of thumb for business structures as there isn’t a ‘one size fits all’ option. Even asking your mate who is an accountant or lawyer for advice is useless unless they are fully aware of your whole situation – and I mean everything … the good, the bad and the ugly. And, let’s be honest, who tells their friends the really ugly financial stuff?

When choosing a structure, your individual personal and business circumstances – current and future – must be carefully considered along with the nature of your business, projected turnover and expected profit. The cheapest and simplest structure is a sole trader, and with recent changes to legislation the ability for small businesses to move between structures has become easier, and implications such as capital gains tax may be deferred or disregarded.

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  • Deb
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    Fantastic article Debra! I researched this when I first set up my business, but it is also a great reminder to look at this regularly, because our financial situation changes as we grow our business and personal assets. Thanks so much 🙂

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