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7 Step Guide to Choosing the Right Business Structure
A common question that a lot of new business owners ask themselves is “what business structure should I choose?”.
The answer to what business structure is best depends on your situation and what your business goals are. Therefore, there’s no easy to this question.
There are four commonly used business structures in Australia:
- Sole Trader
- Partnership
- Company
- Trust
Clients will often earn income from different sources and own different types of investments which will require a complex business structure. This will ensure that their assets are protected, minimise their exposure to risks and implement effective tax planning.
At Box Advisory Services, we’ve developed an easy to understand table of comparisons to some of the key differences between each business structure. Whilst it’s important in choosing the right business structure as your business changes and grows, know that you are not locked into any structure and you can change the structure as your situation evolves.
| SOLE TRADER | PARTNERSHIP | COMPANY | TRUST | |
|---|---|---|---|---|
| SETUP AND COSTS | Registration of Australian Business Number (ABN) – free Registration of the business name – one year ($36) or three years ($84) Separate business bank accounts (recommended but not compulsory) – bank fees may apply | Registration of Australia Business Number (ABN) – free Registration of the business name – one year ($36) or three years ($84) Requires a separate Tax File Number (TFN) Separate business bank accounts are recommended – bank fees may apply | Registration of Australian Business Number (ABN) – free Registration of the company – $900 (plus GST) for a proprietary limited company Separate business bank accounts are compulsory – bank fees may apply | Can be imposed on a person or an entity (a trustee) to hold property or assets for the benefit of beneficiaries Registration of Australia Business Number (ABN) and Tax File Number (TFN) – free Formal trust deed must be setup – legal fees and stamp duty ($1000 plus GST) will apply Registration of company – $900 (plus GST) if the trustee is a new company A separate bank account is compulsory – bank fees may apply Setup costs range dependent on circumstances |
| TAXATION | Taxed as individual Business income is reported in your individual tax return Tax-free threshold is $18,200 in 2018/19Taxes owing are subject to income levels and claimable deductions The highest marginal rate is at 47% (inclusive of Medicare levy) Must be registered for GST if annual GST turnover is $75,000 or more Entitled to a 50% discount on capital gains if the assets are disposed of after one year | The partnership is not a separate legal entity Partners pay tax on the share of the net partnership income you receive Partnership income reported in a partnership tax return – each partner pays tax on their share of the partnership profit at the individual tax rate – may be eligible for the small business tax offset A partnership must be registered for GST if annual GST turnover is $75,000 or more Entitled to a 50% discount on capital gains if the assets are disposed of after one year | Taxed as a separate entity Company income reported in a company tax return No tax-free threshold for companiesThe company tax rate is 27.5% for 2018/19 As a director, you must report any income earned from the company or other sources in the income tax return. This may also include a lodgement of fringe benefits tax (FBT) if you receive any. Must be registered for GST if annual GST turnover is $75,000 or more Not entitled to a 50% discount on capital gains if assets are disposed of after one year In NSW, you can access the land tax threshold for companies if the company owns the land. | Not a separate legal entity A trust tax return must be reported separately Trust does not incur income tax if all of the trust income is distributed to adult resident beneficiaries Must be registered for GST if annual GST turnover is $75,000 or more Entitled to a 50% discount on capital gains if the assets are disposed of after one year Trust can carry over a loss into the new financial year to reduce the trust’s net income in a later year In NSW, generally, there is no land tax threshold for Family Trust. |
| ONGOING COST AND ADMINISTRATION | Minimal paperwork due to a simple business structure and low ongoing costsNo separate lodgement of the tax return from your personal tax return | Minimal paperwork due to a simple business structure and ongoing costs | As it is a more complex business structure, more paperwork is generally required. The company must lodge its own tax return in addition to individual tax returns. Subject to annual review by the Australian Securities and Investments Commission (ASIC)Annual review fee for a proprietary company – $263 | As it is a more complex business structure, more paperwork is generally required. No general ongoing costs except for any accounting fees in relation to tax returns The trustee company (if available) will incur an ongoing cost from ASIC. Changes to the trust deed can incur legal fees if required |
| INCOME | All revenue earned is treated as individual incomeDeductions can be claimed for costs incurred in running the businessFunds can be withdrawn from the business bank account | Each employee is responsible for their own superannuation arrangements | Income earned by the company belongs to the company entity As a director, you may be paid wages or directors’ fee Income can be distributed to shareholders via dividends or loans | Trust income is generally used for tax minimisation purposes. Income must be distributed to beneficiaries every year Losses in a trust are carried forward and are not distributed to beneficiaries |
| LIABILITY OF DEBT | Personally liable for all financial or tax debts as there is no division in liability between business and personal assets Assets under your name may be used to pay business debts | Personally liable for all financial tax debts as there is no division in liability between business and personal asset | Company entity is generally liable for all business debts As a director, you are personally liable for employer obligations such as superannuation and wages | Trustee is generally liable for all debts Provides asset protection for the beneficiary Director of trustee company is liable for employer obligations such as superannuation and wages |
| EMPLOYMENT | Able to employ staff – workers’ compensation insurance required at the time of employing staff | Able to employ staff – workers’ compensation insurance required at the time of employing staff | Able to employ staff – workers’ compensation insurance required at the time of employing staff | Able to employ staff – workers’ compensation insurance required at the time of employing staff |
| OTHER | Business will cease upon the decease of sole traderEquity and debt investment is not as easy for soletraders compared to companies | Partnership may be dissolved. These include: – Partnership terms expired – One partner gives written notice to the other partner to exit the partnership – One or both partners can no longer legally own a business – Court order – Death of one of the partners– Business has gone bankrupt or insolvent Equity and debt investment is not as easy for partnerships compared to companies | Business may still run after the death of the director with the benefit of perpetual succession Equity and debt investment is easier for companies as it is less risky for banks and private investors. | Business may still run after the death of the director of the trustee company or individual trustee. However, trust has a vesting date which is often 80 years or less Outside investment normally prefers to deal with companies rather than trust. |
Box Advisory Services offers a complete range of business and taxation advice for small to medium-sized businesses in Australia. Book an appointment with us now!
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Disclaimer:
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to contractors and small businesses. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek your own advice for any legal or tax issues raised in your business affairs.
