Choosing a business structure when starting up a business is an important element of the setup phase.
Business structure is important as it can impact on taxation, liability of owners, succession, ownership issues and disposal of your business. The four principle business structures include:
Business operators are not limited to one structure alone. For example, it is common for some businesses to apply two or more business structures – eg. business is owned/operated in a company while the plant, equipment, fixtures and fittings are held in a family partnership or trust. This is a common practice for professionals where the primary service operations are separated from administration – commonly called a “service entity”.
When considering a separate “service” entity, consideration also needs to be given to taxation guidelines and rulings relating to what operations can be divided off and that charge rates are reasonable. Where payments associated with service entity arrangements are excessive or the services are not reasonably connected to the conduct of the business, then the ATO may question some aspects of the service fee. It can be critical for business to seek advice from a tax professional.
Before you start a business you should consider the advantages and disadvantages of each type of structure. Your business structure can affect the safety of your personal assets and taxation, the continuation of the business upon ownership change and will determine what registration process you will need to undertake.
Some of the factors to consider when choosing the structure most suitable for you are:
- legitimate tax minimization
- establishment fees and maintenance costs
- asset protection
- type of business
Remember – you are not locked into any structure. You can change the structure as your business and your personal circumstances changes or grows
The ATO’s Personal Services Income (PSI) regulations can impact on labour only type business operations. Advice should be obtained from a registered tax agent or practicing accountant.
Sole Proprietor
Choosing a business structure when starting up a business is an important element of the setup phase.
Business structure is important as it can impact on taxation, liability of owners, succession, ownership issues and disposal of your business.
Of the four principle business structures, Sole Proprietorship is the most common form of business ownership.
Main features of Sole Proprietorship include:
- simple to setup
- low cost to establish
- complete control
- minimal government regulation
- full entitlement to profits
- little disclosure of financial information
- private assets exposed to liability
- restricted to small one person business operations
The ATO’s Personal Services Income (PSI) regulations can impact on labour only type business operations. Advice should be obtained from a registered tax agent or practicing accountant.
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Partnership
Choosing a business structure when starting up a business is an important element of the setup phase.
Business structure is important as it can impact on taxation, liability of owners, succession, ownership issues and disposal of your business.
A partnership business structure is a little more complex than sole proprietorship. With this structure, two or more people start a business and can legally share profits, risks and losses in accordance with the terms and conditions of a partnership agreement or, where no formal partnership agreements applies, in accordance with the common law terms and conditions of partnership.
The main features of a partnership include:
- a Partnership is an association of people who carry on business in common
- it is not a separate legal entity
- all partners are collectively liable for all business debts
- because it is not a separate legal entity, there can be no transfer of ownership between partners or to non partners
- any change of ownership requires dissolution of the partnership
- profits and or losses are distributed to partners in accordance with terms and conditions of partnership agreement
- Capital Gains Tax concessions can apply
- each partner can participate in management
The ATO’s Personal Services Income (PSI) regulations can impact on labour only type business operations. Advice should be obtained from a registered tax agent or practicing accountant.
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Company
Choosing a business structure when starting up a business is an important element of the setup phase.
Business structure is important as it can impact on taxation, liability of owners, succession, ownership issues and disposal of your business.
A company is a legal entity separate form its shareholders and is managed by a director who has additional legal and reporting obligations.
Companies have always been popular for both limiting liability for business owners and for taxation planning. However, due to legislative changes and case law, many of those benefits have been diluted over the years.
For example, company directors today have a much larger burden of responsibility for the operations of the business than their counterparts two decades ago.
As far as taxation is concerned, the reduction in marginal tax rates and increases in income thresholds, taxation benefits have also declined. For example, in 1989, taxation benefits arose when business profits exceeded $70,000 for a typical mum and dad business. The equivalent tax benefit under current tax rates and income thresholds would not apply until business profits exceded $150,000.
Regardless, companies are still popular for business operators for several reasons:
- limited liability (but increasingly subject to changing legislation and case law)
- fixed company tax rate of 30%
- continuity of ownership
- a company structure can effective separate management (directors) and ownership (shareholders) of a business
- higher setup and maintenance costs
- popular as trustee for trust and superannuation structures
- Due to the “separate legal entity” status of a company, sub-contractors in various industries are increasingly required by contracting businesses to use this structure.
The ATO’s Personal Services Income (PSI) regulations can impact on labour only type business operations. Advice should be obtained from a registered tax agent or practicing accountant.
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Trust
Choosing a business structure when starting up a business is an important element of the setup phase.
Business structure is important as it can impact on taxation, liability of owners, succession, ownership issues and disposal of your business.
Trust is a relationship where a business is transferred to a third party (trustee) who has legal control and has a duty to operate that business to benefit someone else (beneficiaries).
Traditionally, trust structures provided taxation benefits and asset protections. However, many of the tax benefits associated with trust structures have been eliminated or substantially reduced by legislation. But in recent time, case law has imposed some challenges in relation to asset protection. For that reason, it is recommended to seek separate legal advice in relation to setting up certain trusts.
There are also many variations of trusts intended for various purposes, for example, discretionary trusts, unit trusts, hybrid trusts, bare trusts and installment warrants. Various legal experts write trust deeds which are sold through various suppliers. Accordingly, trust deeds can vary in wording and intention, with some authors claiming their product as superior to others.
Features of trust include:
- asset protection of business owners/operators (with increasing limitations)
- flexibility in relation to distribution of income and subsequent taxation benefits
- beneficiaries generally not liable for debts of a business
- trust deed can limit activities
- high costs of setup and maintenance
- higher degree of complexity for business owners
- increasing regulations in relation to ownership and management
- losses of a trust can not be distributed to beneficiaries
- retention of profits in a trust can attract taxation penalties
The ATO’s Personal Services Income (PSI) regulations can impact on labour only type business operations. Advice should be obtained from a registered tax agent or practicing accountant.
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