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February 13, 2019

Which Type of Business Structure is Right for You

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Alf Couceiro

Getting your business structure right may not be the first thing you think of when embarking on a new business venture, but it’s one of the most important. The business structure you choose could work with your business, or against it.

But we know it can be a little confusing. So, we’ve put together a snapshot of the most common business structures and the pros and cons of using each one.

There are four common business structure types that are typically used in Australia. And the truth is, you can run your business with any of them:

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

The key is finding the one that works for you in a way that is beneficial and relevant to your business. From tax minimisation through to asset protection, there are a number of factors that need to be considered to determine the right business structure for you.

1. Sole Trader

This is the simplest business structure you can have, and it’s also one of the cheapest ways to get your business started. A sole trader is an individual operating a business under their name where they are solely responsible for all business dealings. Many small business owners start their business in this way.

Pros:

  • Tax effective for smaller profits
  • Ability to use the tax-free threshold
  • Keeps costs low
  • Solely responsible for business decisions
  • Income can be taken as personal drawings at any time

Cons:

  • Tax benefits decrease as profit increases
  • Personal assets could be at risk
  • No line between personal and business

2. Partnership

A partnership is when two or more individuals or entities run a business together. All partners are liable for decisions and the debts of the business. The partnership doesn’t pay tax however tax is paid through the partners’ personal income tax returns for their share of the business profit.

Pros:

  • Set up and ongoing costs are reasonable
  • May have the ability to manage income distribution

Cons:

  • Jointly and severally liable for all business debts
  • Business decisions may be difficult if there are disagreements
  • No easy transfer of ownership

 

3. Company

A company is a separate legal entity in its own right. There are shareholders who own the company and directors who run the company. Companies can be publicly or privately owned.

Pros:

  • Limited liability (personal asset protection)
  • Transfer ownership easily
  • Flat company tax rate (and new small business tax rate)

Cons:

  • Can be expensive with setup and ongoing costs (ASIC/accounting)
  • You cannot withdraw company money for personal expenses
  • Responsibilities and obligations as a company director

4. Trust

Using a trust structure for business is a fairly sophisticated structure that requires professional advice. It holds assets for the benefit of others. A trust isn’t a legal entity on its own and therefore requires a trustee. The trust pays no tax, but beneficiaries pay tax on distributed income.

Pros:

  • High level of asset protection
  • Tax minimisation
  • Income sharing by adjusting beneficiary distributions

Cons:

  • Require specialised assistance
  • Can be costly to set up and manage

Sometimes one size doesn’t fit all in business

These are business structure types in their simplest form, but it’s not uncommon to use more than one of these structures if your business calls for it. The best starting point to determine the correct business structure for your new venture is to speak with an experienced business advisor. After a friendly discussion uncovering the needs of your business, you’ll be well on your way to business success.

Set yourself up for success from the start. A Modoras Business Advisor can help find the right business structure for you. Call us on 1300 888 803.

 

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IMPORTANT INFORMATION: This blog has been prepared by Modoras Accounting (VIC) Pty Ltd ACN 145 368 850. The information and opinions contained in this blog is general information only and is not intended to represent specific personal advice (Accounting, taxation, financial, insurance or credit). No individuals’ personal circumstances have been taken into consideration for the preparation of this material. The information and opinions herein do not constitute any recommendation to purchase, sell or hold any particular financial product. Modoras Accounting (VIC) Pty. Ltd. recommends that no financial product or financial service be acquired or disposed of or financial strategy adopted without you first obtaining professional personal financial advice suitable and appropriate to your own personal needs, objectives, goals and circumstances. Information, forecasts and opinions contained in this blog can change without notice. Modoras Accounting (VIC) Pty. Ltd. does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained within, Modoras Accounting (VIC) Pty. Ltd. does not warrant that the articles within are free from errors, inaccuracies or omissions. To the extent permissible by law, neither Modoras Accounting (VIC) Pty. Ltd. nor its employees, representatives or agents (including associated and affiliated companies) accept liability for loss or damages incurred as a result of a person acting in reliance of this publication. Liability limited by a scheme approved under Professional Standards Legislation.

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