If you’ve decided to pursue your passion and start your own business, choosing a business structure is probably the last thing on your mind.
However, it can be a decision that can have long-term legal and financial effects and can be a major influence on the way that you operate your business.
Choosing the right ownership structure comes down to what you want to achieve with your business and your overall financial goals.
This also means you don’t always have to own your business.
So, who should own your business?
When it comes to ownership structure, you have the option to run your business as a sole trader, a partnership, a company or in a trust.
Each form of ownership has benefits and drawbacks that you have to carefully weigh up before making a decision.
In some cases, it can be hard to change the business structure once you’ve committed so getting independent advice from a professional is essential.
This type of business structure makes sense for business owners just starting out.
As a general rule, you’re self-employed, you’re not making a lot turnover (generally $50,000 or less), and you don’t have much personal liability.
Some examples of professionals that operate as a sole proprietorship include tradesmen who work for a company but may take on weekend work on the side or food vendors at local markets and community events.
It’s quite cheap and easy to set up an Australian Business Number (ABN) with the Australian Taxation Office (ATO).
The reporting requirements are actually very similar to that of a PAYG employee: if you’re operating under your own name, you’ll simply need to complete one tax return a year.
A sole trader ownership structure means unlimited liability for you as the sole director.
If you’re planning to gradually grow the company, acquire more assets like investment properties and hire more staff, your personal liability increases very quickly.
That’s not to mention the fact that you won’t be permitted to raise capital for your business and you’ll have limited options for estate planning.
Check out the sole trader business structure page for more essential information on setting up a sole proprietary.
Do you have an amazing business idea but need help from a family member or friend to turn it into a reality?
A partnership is a great way to pool together resources, leveraging both capital and skills and expertise, to build a much stronger business model.
In many cases, it may be that one is responsible for injecting capital investment into the company while the other has the expertise and skills to manage the business and drive profits.
In terms of ATO reporting requirements, you’ll simply need to a file a partnership tax return along with each of your individual tax returns.
Apart from leverage each other’s resources, you also have the option to hire.
The other big benefit is that you can set up some limited liability in that the partner only injecting capital into the venture is only liable for their proportional share in the business.
One of the most important things to consider with a partnership is that you have to really trust your partner will do the right for the business as well as meet their legal and financial commitments.
Similarly, there can be delays and disagreements when major business decisions need to be shared each partner.
If it gets to the point where you want to end the partnership or change to a new ownership structure, the legal considerations and costs can make it difficult to do so.
You can find out more on the partnership business structure page.
Businesses that are making significant turnover (typically $100,000 or more) and need asset protection may turn to a company business structure over a sole proprietary or a partnership structure.
The company tax rate is a lot lower than the personal tax rate that you’ll pay with a sole proprietary or a partnership.
The company will pay tax on business profits (30% or 30 cents to the dollar) and you can draw down whatever you need for yourself.
You can also take advantage of:
- Limited liability to protect your assets in case things turn pear-shaped in the business.
- Income-splitting between family members.
- Capital raising to grow your business.
The main disadvantages with a company ownership structure to set-up your company via the ATO can be costly.
The ongoing reporting requirements can send a lot of business owners around the bend as well.
In addition, it’s important to understand that although a company structure means limited liability for the directors, it doesn’t mean your assets are always completely protected should the company be sued and/or fall into liquidation.
The company business structure page explains more on the difference between unlimited and limited liability.
If you have more than one family member involved in running your business and the business is growing, you might want to consider switching to a trust structure.
The trustee, which is usually the company itself, operates as a business for the benefit of beneficiaries (you as the director and your family). Because of this, there are a number of tax benefits you can take advantage of.
The main benefit operating the business via a trust ownership structure is that you have better asset protection than a company structure because your business is actually owned by the trustee rather than you as the beneficiary.
Through income-splitting between family members, you take advantage of nominal tax rates, which is another key difference to a company business structure.
Since you can also passive investments like real estate within the trust, this type of business structure is also great for estate planning.
Your assets aren’t completely protected, specifically in the event that the assets within your trust aren’t enough to pay your debts or liabilities (such as being sued).
In addition, the initial and ongoing costs can be high and these legal fees can’t be justified if you can’t effectively income-split.
Setting up a trust isn’t for everyone, particularly if you need an investment loan to buy a property. The trust business structure page can explain more of the legal and tax considerations to take into account with this type of ownership structure.
Have you gotten legal and financial advice?
Whether you’re just starting your business or you’re looking to take that next step in growing your venture, it’s important to get an independent legal advice from a solicitor who specialises in company law.
In addition, seek out guidance from a financial planner and an accountant.
These two professionals can help you map out what your ultimate business and financial goals are and what type of business structure would be in your best interests.
Although there is no perfect ownership structure, some structures will work better for you than others.
As mortgage brokers, we can’t advise you on what business structure will work best for you but we can help you qualify for a business loan.
We even do franchise loans!
Call us on 1300 889 743 or complete our free assessment form and find out why we’re business loan specialists.