While beginning a new business might inspire enthusiasm, it can also be complex and confusing. Choosing a business structure is typically one of the first things you consider. But not only new business owners should look at the many kinds of business structures. You’re either starting a new firm and need guidance on how to structure it effectively, or your Company is transforming, and your current organizational structure is no longer suitable.
To choose the best business structure, weighing various aspects, including startup costs and long-term asset protection, is necessary. All these elements are essential in establishing the best system for you. It’s important to remember that corporate structures can be altered almost immediately, but they should still be appropriate for the Company’s current needs.
1.Sole Trader
Small business owners are best served by the sole proprietorship form, mainly when the Company is built on the owner’s unique skills and abilities. A sole trader may register a business name (such as Jenny’s Automotive) or operate under their name (for example, Jenny Lee). Many new businesses find this structure highly tempting because of how easy it is to start up, how inexpensive it is, and how much control you have.
The Sole Trader Business Structure’s Key Characteristics are:
• Sole Traders are entirely liable for any debts incurred (which may extend to the owner’s assets);
• Sole Traders pay tax on the net profit generated from their business activities.
• Simple and low-cost setup process.
• Relatively easy to change the business structure as it grows.
The business owner has complete control over the operation and benefits from its success. Sole traders are not considered employees of their businesses, so they are not eligible for the minimum superannuation guarantee payments. The income is reported on their tax returns and taxed at marginal rates. They may make personal concessional (deductible) contributions up to the yearly cap to their designated super fund.
Costs: The Sole Trader organization is inexpensive to set up and has few legal requirements.
2. Collaborations
A formal agreement between two or more parties to manage and run a firm is known as a partnership. Each partner in this structure shares the risks and benefits. It is strongly advised that the owners create a Partnership Agreement to explicitly lay out the rules and conditions of the Partnership for security purposes. A Partnership has its own Australian Business Number (ABN) and Tax File Number (TFN).
A partnership automatically dissolves upon the death of one of the partners. A partnership must file an income tax return, but the Partnership does not pay its taxes. Taxable income or loss is distributed to the Partners following the Partnership Agreement. Different skills can be pooled together. The business’ profits and losses are shared among the partners. If no agreement is made, the partners split profits and losses equally. Unlimited liability means each partner is responsible for the entire business liability if other partners cannot fund their shares. Partners cannot be employees of their Partnership, so they do not receive a salary or the minimum superannuation guarantee. Similarly, to a sole trader, the partners’ share of the income or loss is included in their personal tax returns, in which the partner pays tax at marginal rates. Partners may, however, contribute up to the annual cap on their own concessional (deductible) personal contributions.
Cost: The cost of forming a partnership is low. The use of a partnership agreement is strongly advised.
3. Businesses
A company is a legitimate organization that one or more people can create to run a business. There are two categories of firms in Australia: public and private. Due to the increased regulation and reporting requirements for public corporations, private companies are more prevalent. The Company’s shareholders are its owners, and directors are chosen to oversee them.
Critical Elements of the Business Structure of the Company:
Company profits stay in the business until they are distributed to shareholders. The Company is required to file an annual tax return and pay taxes. Companies are distinct legal entities, and the assets and liabilities owned by the Company are entirely separate from the directors and shareholders.More laws must be followed, and directors can incur severe fines for breaking these regulations. Profits are taxed at a flat rate rather than at marginal rates.
Expenditures: Establishment and compliance expenditures make starting and running a company more expensive.
4. Trusts
Trusts are a common choice for corporate structures in Australia because of their adaptability and tax advantages. A Trustee, a company, or an individual manages the business on behalf of the beneficiaries when there is a Trust. The Trust must file its tax return each year and have its Tax File Number (TFN). The recipients report their income share on their tax returns and pay tax at their marginal rates.
Although many different forms of Trust exist, discretionary and fixed beliefs are the most popular. In contrast to discretionary trusts, which offer greater freedom in how revenue is distributed, fixed trusts give beneficiaries a fixed percentage of their income depending on their ownership of the Trust. The Trust Deed describes the Trustee’s authority and the Trust’s operational guidelines.
Trusts have higher compliance and startup expenses than other business structures like sole proprietorships or partnerships, although they have tax advantages. Corporate Trustees can offer better asset protection than individual Trustees; however, creating a Trust can be expensive. In general, trusts can be a helpful company structure for companies seeking flexibility in income distribution and tax liability management.
The trust business structure’s main characteristics are:
• On behalf of the beneficiaries, the Trustee controls and holds the Company’s assets. A company, a single person, or a group can serve as the Trustee.
Comparatively speaking, Corporate Trustees provide a high level of asset protection.
• Based on their proportional ownership in the Trust, fixed trust beneficiaries must receive a set percentage of income each fiscal year.
• Discretionary trusts give recipients additional flexibility in how their income is distributed.
• Annual tax returns for trusts are necessary.
• Beneficiaries are required to report their share of Trust income on their tax return and pay tax at their marginal rates.
Costs: Higher compliance and establishment costs are associated with creating and managing a trust.
What Makes Business Structuring So Important?
Making the right business structure decisions can significantly impact your Company’s operations in terms of tax liabilities, asset protection, ongoing costs, and compliance requirements. Understanding how your structure will help your business and daily operations is crucial. Let’s take a closer look at some of the factors.
1. The Effects on Taxes
Every business structure has unique tax ramifications, and the nature and size of your operations can significantly impact which system is the most advantageous to use.
For instance, a Company’s profits are taxed at a fixed rate of either 25% or 30% in the fiscal years 2023 and 2024, depending on their base rate business classification. The tax rate for sole proprietors who make the same amount of money can be as high as 47% (Medicare Levy included)! Each firm pays a wildly varied amount of tax for the same earnings, depending on the type of legal framework the Company employs.
Changing your business structure can now be done relatively instantaneously, but tax repercussions may occur. Tax breaks are available to assist with these changes, but they have criteria for qualifying.
2. Asset Security
The best approach to protect your assets is by setting up a company or Trust. This is primarily because these corporate organizations are separate legal persons from their owners and are liable for their debts.
There is a distinct line between a Company and personal assets when a Company operates a business. Personal assets should be secured in the terrible event of Company liquidation or litigation.
It is crucial to remember that trusts can offer the same level of protection if a corporate trustee rather than an individual trustee is appointed.
3. The price of upkeep for the building
To maintain compliance, recurring annual expenses must be paid for companies and trusts. The entity must prepare financial statements and file a tax returns each year, which can result in excessive accounting bills. Companies must also pay an annual review fee to ASIC to maintain their registration status.
Sole proprietors or partnerships do not incur these recurring expenses to keep the firm operating.
4. Making Sure Your Industry Is Compliant
Depending on your industry, a different business structure may be acceptable. For instance, a low-cost facility like a Sole Trader may be advantageous if you operate a handyperson business or a primary hair shop. Contrarily, professionals that deal with numerous clients and may be subject to liability or litigation difficulties, such as doctors, lawyers, and builders, need a safe structure that safeguards their assets.
Depending on your industry, the business structure may be subject to minimal criteria. Companies that work with government agencies frequently must run their operations through a company.
A strong organizational structure is very beneficial. Remember that the design that works for your Company now might not be the most significant choice in five years.
