The New Year inspires fresh ideas and now that our holidays are over, it is the perfect time to start putting plans into action. Have you thought about starting your own business but repeatedly postponed taking the first step because it all seemed too complicated and daunting?
The good news is that you do not have to do everything on your own; a good accountant can be a valuable resource, especially in the establishment phase. The first way an accountant can support your venture is by helping you choose the best structure for your business.
Here are the pros and cons of some business structures to consider:
1. Sole Trader
· Pros
o Owner retains full control
o Easiest and cheapest to establish
o Minimal reporting requirements
o Owner is taxed on profits at personal tax rates but also has access to tax losses which may be offset against other income subject to several conditions
· Cons
o Owner has unlimited liability, which means that personal assets are at risk
o Reduced opportunities for tax planning as business profits and losses cannot be distributed
o Limited access to finance
2. Partnership
· Pros
o Shared responsibilities and obligations among partners
o Relatively easier and cheaper to operate
o Minimal reporting requirements
o Combined skills and knowledge of partners
o Pooled assets and resources that partners contribute
o Partners are taxed on profits (distributed based on the partnership agreement) at personal tax rates but also have access to tax losses which may be offset against other income subject to several conditions
· Cons
o Joint and several liability, meaning all partners are accountable for liabilities incurred by other partners
o Potential for disputes over administrative and strategic control as well as profit sharing
o Changes of ownership generally require a new partnership to be established
3. Company
· Pros
o Reduced personal liability for business debts
o A company is a separate legal entity and can own property, take on debts, and sue or be sued in its own right
o Profits are taxed at 30 percent
o Profits can be retained in company or paid to shareholders as dividends, which allow more flexibility in tax planning
o Dividends can be franked, which means shareholders receive credits for tax already paid by the company, which would reduce shareholders’ personal tax
o If there are no franking credits to be utilised, you can be paid wages or directors’ fees instead, which are tax deductions for the company
o Easier to sell or transfer your ownership
· Cons
o More compliance and ongoing administrative work
o Company losses cannot be offset against your other income
o Higher set up and wind up costs
4. Discretionary (Family) Trust
· Pros
o Reduced personal liability, especially if trustee is a company
o Profits are distributed to different beneficiaries, which allows more flexibility in tax planning
· Cons
o Profits must be distributed to beneficiaries, which limits tax planning e.g. profits cannot be retained at discretion and distributed to you in a future year in which you expect income to be lower
o Trusts are not taxed on profits and beneficiaries are taxed personally for any distributions received at their individual tax brackets
o Trust losses cannot be offset against your other income
o Not a separate legal entity so the trustee would have to act in its capacity on legal matters such as property and debt
o Trusts generally have a limited life of 80 years
There is no perfect structure as the most appropriate one depends on your particular circumstances and preferences. Our business advisory team would be happy to help you kick-start your enterprise and provide ongoing support for you to achieve your business goals. Please call us at (08) 9367 7023 to schedule a consultation.