What is the best business structure for me?
‘What is the best structure?’ for your business is a big question for any new business starter.
The good news is, you can change the structure of your business as it changes and grows. Although care needs to be taken, as any change in the value of the business may trigger a capital gains tax event.
The initial structure needs to ensure that you have taken everything that your business entails into account, such as:
- Protection of your business and personal assets
- Ease of admission of new partners or investors
- Minimizing tax exposure
- Complying with any legal or regulatory requirements
- Access to potential Research & Development Grants
- Use of potential future capital gains tax discounts and small business GST concessions
While structuring your business as a Sole Trader is the simplest and most ‘mess free’ structure, it does come with some challenges and things that you need to take into account.
Can you still hire staff if you are a Sole Trader?
The answer to that question is ‘Yes’, but this still involves other implications such as employee protection (insurance), induction and training obligations and superannuation to mention a few… nothing in business is easy and straightforward!
Being a Sole Trader gives you full control over your assets, but personal exposure to trading risks – something that may be minimised in structures such as a Partnership or Company.
Being a Sole Trader is the simplest business structure. It means that you can use your personal Tax File Number to lodge tax returns, but also means you are personally taxed on all your profits. Record keeping may be easier and the decision structure is perfect for the business starter – things start and end with you.
Once you do grow your business, someone integral in the growth of your business may want to buy into your business or you could want to expand your management structure which could see you consider forming a Partnership or a Company.
There are three basic types of Partnership as listed on the business.gov.au website, however, the most common for small businesses is the General Partnership.
You will need to review your needs and structural requirements of any new or upcoming partners before you choose a structure that suits.
Once you become a company
This is planning for great prosperity and growth – things get really serious and the requirements from the government (ASIC) and the tax office increase substantially. However, there are many advantages in having a company as part of your business structure.
A company is a separate legal entity with its own tax file number. It pays tax at a flat rate (26% from 1/7/2020), while the owner/s are taxed on their salary and/or Directors fees. A company allows you to distance yourself from the business debts and limits the liability for debts to the business assets – not your personal assets.
Another common structure is a family, or discretionary trust. As a trading business, a trust is best used with a company as its trustee. While they may seem a bit more complex, they do allow for some great benefits in income distribution, tax planning and wealth accumulation strategies. Like a company, they lodge their own tax return and have their own tax file number.
Do you know how long you are required to keep your business records for your particular business structure?
Are you aware of all your reporting requirements?
Do you have proper insurance for your business? For instance, even if you are a sole trader who works from home it is important that you have Professional Indemnity insurance and possibly Public Liability Insurance.
Think in this way – if you are a beautician who works from home you are probably sure that your only overhead is product.
What if one of your clients is terribly allergic to your product?
What if someone is injured on your premises?
There is so much to consider when starting a business – and as such, a structure is the first and most important decision when you begin your business journey.
No business owner knows everything they need to know about running a business. Unless they stay across legislation, business news (locally and overseas) and are aware of every little thing that might affect their business.
That is why you need to contact the business specialists at Think Accountants to discuss all aspects of your business and how you start, grow and eventually how you wind down, sell or pass on your business.
Let us help you over your business journey.