Why is business structure is important
You’ve got your business name and your business cards, you may have even bought a domain name and set up a website. But before you go any further – have you given any thought to the legal structure of your business?
Getting your business structure right is important. One business structure isn’t necessarily better than another, but each has their own advantages and disadvantages. A business structure should be chosen with your particular business in mind and what you require in relation to income distribution, tax management and limiting liability. You may also wish to consider any relevant personal circumstances that apply.
Spending time getting it right at the start will minimise headaches (and costs) down the track.
Consider the costs involved
Set-up costs can be a barrier to entry especially when you’re setting up a small business. And this starts with your business structure.
Costs to set up as a sole trader can be fairly minimal. You’ll need to register a business name if you aren’t using your own and you’ll need to get yourself an ABN – and then you’re open for business.
Generally, the costs for a company and/or trust are higher than other business structures. (Not to mention the volume of paperwork too)!
Limiting risk or protecting your personal assets
Some business structures offer better protection than others when it comes to protecting your personal assets.
If limiting risk is an important factor for you when choosing a business structure, you’ll likely need to consider a complex structure such as a company or a trust. It’s difficult to limit liability with a sole trader or partnership structure.
It’s important to note that in certain circumstances, you may still be somewhat exposed with any type of business structure.
Does it offer taxation benefits?
Taxation implications vary depending on the business structure you choose.
A sole trader gets the benefit of the (personal) tax free threshold however they will be taxed at marginal tax rates for the profit they generate. As their profit increases, it may cease to be beneficial to remain as a sole trader.
Companies are taxed at the small business tax rate of 27.5% or corporate rate of 30% no matter their taxable income. However, any income paid to you personally from the company will need to be declared on your personal tax return and you’ll pay tax at personal tax rates for this amount.
Although a trust pays no tax, you have a high level of control over beneficiary distributions each year which may prove to be helpful from a taxation perspective.
What are your legal and reporting obligations?
No matter your business structure, you will always be required to stick to the ATO guidelines around claiming business income and expenses.
However, if you have a company or trust, you may have additional reporting and obligations that come with these business structures. This could include:
- Making decisions in line with the company constitution or trust deed
- ASIC notification of key changes
- Annual review
These extra obligations equate to time and money you’ll need to spend in meeting them.
Ability to raise capital
Some businesses have the ability to expand without cash injections but if you are looking for an external investor, a company structure may be the most suitable way to facilitate this. Investors may want a share of your business in return for their investment – and this is easier to do within a company structure.
In a sole trader or partnership arrangement, capital is often raised through internal measures such as borrowing or capital contributions from owners.
Seek advice but understand any decisions made on your behalf
We often see businesses with complex business structures and ask them why their businesses are managed this way. And too many times, the unfortunate business owner isn’t quite sure and tells us it’s what their advisor recommended.
It’s vital you understand the basis for all financial recommendations as you are the one who is ultimately responsible for the financial structures in your name.
There’s no need to over-complicate your business structure if there’s no valid reason for it.
Am I locked in, or can I restructure my business later?
Although it’s important to get your business structure right from the start, remember that things may change in the future. And what is right for you as you are starting out may not be the structure that the mature version of your business needs.
Your next step…
We can help identify your business requirements to make choosing a business structure easier and set you up for success. Speak to one of our business advisors on 1300 888 803 today or book an appointment by clicking here.
IMPORTANT INFORMATION: This blog has been prepared by Modoras Accounting (QLD) Pty. Ltd. ABN 81 601 145 215. 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 (QLD) 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 (QLD) 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 (QLD) 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 (QLD) 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.