Five things to consider when choosing a business structure
Butlers Business and Law
Choosing an appropriate business structure is extremely important when investing, optimising taxation and protecting your assets. If the wrong structure is chosen, this may require a costly restructure at a later date. The most common types of structures are sole traders, companies, partnerships and trusts.
There are five key factors that you must consider when choosing a business structure, or deciding to restructure:
Is asset protection a priority?
Your asset protection needs will depend on the risk profile of the business and the owners. Identify who the ‘at risk’ individuals are in your structure. In professional practices, this will usually be the professionals running the business. In other businesses, this will be whoever is taking on the risks. What will happen to their assets if the business cannot pay its debts?
Will you be working alone, or will the business have multiple owners?
You need to consider how other individuals can enter and exit the business. It is important that you choose a structure that suits the number of owners of the business, and can flex and adapt to later changes. Some structures are only appropriate for individuals, such as a sole trader or discretionary trust. Other structures, such as partnerships or companies, will be able to facilitate multiple members.
What are the taxation implications?
Each structure has distinct tax implications. Income tax and Stamp Duty are high priorities when initially choosing a structure for a business. Capital Gains Tax is a significant consideration in restructuring.
While it is important to choose a structure that optimises taxation implications, you need to ensure that the choice of structure is not purely motivated by tax avoidance. Tax laws prohibit structures which are only devised for tax avoidance purposes. To ensure that your chosen structure is upheld by the courts, it must be able to be justified by other reasons, such as asset protection.
Do you need to split income?
Some structures allow you to split income. This is particularly useful if an owner’s partner earns less income, attracting less tax liability. However, if you are providing a personal or professional service, you will need to be mindful of the anti-avoidance personal services income rules. In particular, the ATO have issued warnings regarding the application of the rules to professional firms.
Do any regulations in your industry or profession affect the structures you can choose?
Some industries can only use particular structures. For example, only a natural person may become a liquidator. The laws that regulate your industry or profession should be the starting point in choosing an appropriate structure for your business.
In order to make an informed decision about the most appropriate structure for your business, you need expert legal and accounting advice. When consulting with your advisors, make sure that you highlight what is most important to your choice and plans for the future.