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May 03 - Business Advice - Tax Accounting

How Should You Structure Your Business?

When building anything from the ground up, getting the foundations right is key. Unsurprisingly, the same goes for building a business. 

Your business’s structure might not be top of mind when nutting out your business plan, but it should be – choosing between being a sole trader or a company, a trust or a partnership is more than just choosing a title for the ATO. It can have a big impact on your tax, your personal liability, and your ongoing costs.

To get off on the right foot, it’s a great idea to seek professional advice early on (and don’t we love to give it!) But if you’re reading this a few years in and you’re worried that you made a mistake in the structure that you chose back in the early days, the good news is that with a bit of help, it can be fixed.

Each structure is unique, and suited to different types of businesses:

Sole Trader 

A lot of one man or one woman band businesses start out as sole traders. This is usually because it’s the simplest and least expensive way to start a business. 

While there aren’t many legal and tax formalities for sole traders, if you operate as a sole trader, you’re responsible (and liable)  for all aspects of the business. This means that all debts and losses fall to you, and can’t be shared with anyone else. 

While you can have employees as a sole trader, you can’t employ yourself, and you must pay all employees superannuation as well as taking care of your own. 

Sole traders have an Australian Business Number (ABN), but use their individual tax file numbers to lodge their income tax returns. They pay tax at the same income tax rate as individuals and must put aside money to pay their income tax rate at the end of the financial year. 

Partnership

A partnership is similar to a sole trader, except you’re in it with someone else or a few other people. This means that the responsibilities and liabilities are split between partners. Partnerships are often utilised when friends, family or associates go into business together. 

Like sole traders, partnerships are inexpensive and relatively easy to set up. While a written partnership agreement isn’t legally required to form a partnership, they’re a good idea so that it’s clear how income and losses are distributed and where control of the business lies. 

While sole traders use their personal ABN, partnerships have their own TFN and must lodge annual returns. When it comes to paying tax, the partnership as a collective doesn’t pay tax, instead,  each partner pays tax on their share of the partnership’s profits at their individual tax rate. As a partner you can’t claim deductions for money drawn from the business and amounts you take from a partnership are not wages for tax purposes.

Trusts

Trusts are where things get a little more complicated, but trust us, for the right business they can have big tax advantages!

A trust is a legal responsibility imposed on a trustee (which can be an individual or a company) for the operation of the trust and to hold business assets for the benefit of others (beneficiaries).

Trusts are more expensive to set up than Sole Traders or Partnerships because they require a formal deed as well as yearly administrative tasks.

Trusts have their own ABN and must pay super to any of its employees, including the trustee if they are employed by the trust. While trusts have their own TFN for lodging its annual tax return, whether the trust pays tax depends on how the trust income is distributed, and this decision is made before the end of each financial year and documented by way of distribution minutes. Typically, where trust income is distributed to adult resident beneficiaries, each beneficiary reports the income in their own tax return. Where the trust accumulates net trust income (does not distribute it), the trustee may be assessed on that accumulated income at the highest individual tax rate.

Companies 

Companies are another can of worms and are slightly more complex again. A company is its own legal entity and can incur its own debts, can sue or be sued. People who run companies are called Directors and owners of a company are called Members or Shareholders. These people generally have limited liability for their company’s debts. 

Companies have higher set up and administration costs. Companies have their own TFN and are taxed at a different rate to individuals, each year, companies are required to submit their annual company tax return. 

Rather than individuals or trusts owning the money earnt by the business, as is the case with Sole Traders, Partnerships and Trusts, a company owns the money that the business earns, and individuals who control the business cannot take money out of the business, except as a formal distribution of profits or through wages.

Companies must pay super contributions for any eligible workers. This includes company directors. 

Regardless of a business’s structure, all businesses must be registered for GST if its annual GST turnover is $75,000 or more. 

Which is the best for my business?

Well that is the million dollar question, and there’s no short and fast answer, but a quick chat over a coffee (we can do a beer too if that’s more your bag!) with one of our team and you’ll be well on your way. Give us a call today to set up some time, and we can sort you out before the end of the financial year.