Once you’ve taken the plunge to start your own business one of the daunting tasks you may face is selecting the appropriate vehicle to trade through. Even if you may have been in business for many years it is a good idea to reassess the effectiveness of your present structure from both a tax planning and asset protection perspective.
With a myriad of options – sole trader, partnership, company, discretionary trust, unit trust, hybrid trust – the most appropriate structure is not always obvious and varies depending on individual circumstances. It is essential that professional advice is sought.
Here is a brief overview of some structures.
Sole Trader – Trading in your own name
As a sole trader, you trade in your own name or alternatively a trading name can be registered with the Department of Fair Trading. This structure should only be used in the formative stages of your business or until it becomes viable. Due to high marginal tax rates and lack of asset protection other vehicles must be considered long term.
Partnership – A Second Step Along Your Business Route
Partnerships do not provide for asset protection which is of concern when business partners are not family. A formal partnership agreement can be prepared, however not essential. Establishment costs are minimal.
Companies – Separate Legal Entity at Law and Most Commonly Used Business Structure
Companies provide asset protection subject to normal business practices and afford tax planning opportunities due to differential in company and marginal tax rates. Superannuation is an added advantage. However, companies are not the ideal vehicle for ownership of long term assets. Accounting and establishment costs for companies are higher than a sole trader or partnership.
Trusts
Trusts are the least understood of all business structures but are the most flexible. For mature business practice it is recommended that a company be appointed trustee of the trust. With a discretionary trust, net profit is distributed at the discretion of the trustee and may change from year to year. Unit trusts distribute their profits in relation to the unit holdings of the beneficiaries and hybrid trusts are a combination of both. Trusts are ideal from both a tax planning and asset protection perspective. Administration and establishment costs are similar to that of companies.
Summary
There are several factors to be taken into consideration when structuring your business. Circumstances vary greatly and a combination of different structures may be necessary.
