Different Business Structures
When starting or expanding a business one of the first decisions you need to make is which structure will work best.
It can seem overwhelming to know how to structure your business as each carries its own rules and regulations. It’s important that before establishing your business you understand the advantages
and disadvantages of each so that you are fully aware of your potential personal liability and legal obligations, both now and in the future.
The four common business structures which are available include:
A company is a complex business structure with higher set up costs and administrative costs. You will need to register your company with ASIC and company officers must comply with legal obligations under the Corporations Act.
A sole trader on the other hand is the simplest business structure as there are less legal and tax formalities. You can set yourself up as a sole trader either under your own name or a business name. If you choose to work under a business name, you will need to register your business name with ASIC. As a sole trader all aspects of the business are liable to you.
A partnership exists when you are a group of people running a business together, but not as a company.
Operating as a trust means that you hold property or income for the benefit of others (beneficiaries). The trustee has the power to decide how the profit will be distributed amongst the beneficiaries. No tax is liable, rather the profits from each year are distributed amongst the beneficiaries who pay tax.
What are the differences between a sole trader and company?
– Must obtain an ABN – Free – Choose and reserve a company name – from $45 – Company registration – $463 for a proprietary limited company – Business name registration – one year $34 or three years $79 – Must have separate business account – Taxed as a separate entity – No tax free threshhold for companies – Company tax rate is 28.5% for Small business and 30% for larger companies – Must report any income you earn from the company or other sources in an income tax return. May need to lodge a fringe benefit tax return if you recieve fringe benefits.
A Sole Trader
– Register for ABN – Free – Business name registration – one year $34 or three years $79 – Separate business account – recommended but not compulsory. – Taxed as an individual – Can report your business income in your individual tax return – 2015 – 2016 tax free threshold is $18,200 – Tax paid will depend on various factors including income and deductions you can claim
What are the advantages and disadvantages of being a Sole trader?
– You have complete control
– Cheapest to set up and easiest to administer
– Sole trader is eligible to claim 50% Capital Gains Tax discount for individuals
– Does not have payroll tax and workers compensations liabilities
– You are able to change your business structure if circumstances change.
– If the business is being started part-time, while the owner continues in full time employment, when operating as a sole trader, the owner can reduce tax payable on the employment income is losses are made.
– As a sole trader you are not an employee of the business which means that there is no need to pay compulsory employee superannuation contributions.
– Has total control of assets and business decisions
– Tax free threshold applies
– The individual is liable for any and all business-related obligations – assets in your name can be used to pay business debts – Limited ability to split income – Difficult to raise capital – no name protection – If owner dies or retires, business also discontinues – Personal Services Income rules apply
What are the advantages and disadvantages of running a business as a company?
– Exists as a legal entity separate from it’s owners and those who manage the company. – Remains in existence until de- registered – Shareholders and directors are generally not liable for debts of the company – Able to split the income – The ability to make Pay As You Go (PAYG) instalments which are credited against the total annual income tax. The amount of tax liable is then reduced by the PAYG installments. – May be eligible for tax concessions – May be able to treat income and deductions relating to your personal skills or efforts as an individual (called personal services income) – ie. for tax purposes your income may be treated as your individual income.
– No tax free threshold
– Considerable cost to set up
– Can be expensive to establish, maintain and close.
– If the directors fail to meet their legal obligations, they are able to be held personally liable for the company's debts.
– No discount on Capital Gains Tax
– The profits that are distributed to shareholders are taxable.
– Financial affairs are public
By making the right decision on the structure of your business from the word ‘go’, you will in effect save yourself thousands of dollars later down the track if you decide to change your structure. With any decisions that you may it is vital that you seek legal advice in making your final decision. If you would like further information on how best to structure your business, contact us on 02 9411 5070 or email firstname.lastname@example.org.
This information is not to be relied upon without speaking to your accountant, tax agent or financial adviser depending on the advice.