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How to Choose Your Business Structure.

Article by WealthSafe.

Date Published: 31 May 2013

So, you attended one of those wonderful weekend seminars that get you excited about owning your own business and empowering yourself to be in control of your finance.

During your time at the seminar, with all the excitement and positive energy flowing, ideas and plans come into mind. You meet up with some people and together formulate a plan to make it happen.

You get home and go back to the grind of everyday life. What to do next? Where do I go and how do I start? Can you relate to this? I certainly did…

Deciding how to structure your start-up is one of the most crucial decisions you face when diving into a new business venture.

Businessdictionary.com defines a business structure as an organizing framework legally recognized in a particular jurisdiction for conducting commercial activities, such as sole-proprietorship, partnership, and corporation.

But to keep the issue simple, we will define a business structure simply as a framework to make sure your business runs smoothly — both financially and legally.

Because how you structure your business has a direct impact on your tax returns. Having the right structure also can save your business time and money.

There are real advantages in choosing a structure best suited to the way you want to operate your business. It’s important to understand these advantages and responsibilities as they may affect:

  • The way tax applies to your business
  • Protection of your assets
  • Your operating costs
  • How other businesses deal with you

Without further ado, let’s look at the four commonly used business structures in Australia:

1.    Sole Traders

If you operate your business as a sole trader, although you may decide to have employees, you trade, control, and manage all aspects of your business.

Advantages
  • There are very few legal and tax formalities involved in setting up the business
  • The structure is inexpensive to set up
  • You have full control of the business
  • You receive the full benefit of profits made by the business
  • You keep all the after-tax gains if the business is sold
Disadvantages/Things to consider
  • You are at serious risk of being sued at all times, as you are legally responsible for all aspects of the business, which can stuff up your credit rating
  • You always remain personally liable for ALL debts, not just some of them
  • Your access to finances is usually limited to your own resources
  • If you have no employees, you usually have to do all the work
  • You cannot share debts and losses, or split income for tax purposes
  • You may end up using private assets such as your home, contents and vehicles to settle debts of the business

2.    Partnerships

If you operate your business as a partnership, you’re carrying on your business with one or more other people as partners and receiving your income jointly.

Advantages
  • Partnerships are inexpensive to set up
  • You can split income with your partner
  • You have greater access to finances from the resources of all partners
  • There are more people to share the workload
  • There are more people to share losses and legal responsibilities
Disadvantages/Things to consider
  • You and your partner are JOINTLY and SEVERALLY responsible for all debts and losses of the partnership, even if you do not directly incur or cause the debt
  • You have minimal asset protection
  • You share the profits with the other partners
  • You may end up using private assets such as your home, contents and vehicles to settle debts of the partnership

3.    Companies

If you operate your business as an incorporated company, the business is a distinct legal entity that is regulated by ASIC (Australian Securities and Investment Commission).

A company is a more complex business structure. Usually, the set-up and administrative costs for a company are higher than for other business structures.

Advantages
  • A company has far greater access to capital for the running of the business
  • A company can split income between shareholders and pay wages
  • Shareholders are not liable for the debts of the business
  • There is limited liability for directors, and therefore, increased asset protection
  • It is difficult for liquidators when winding up a company to get access to directors’ personal assets, so directors remain relatively secure
Disadvantages/Things to consider
  • A company is more expensive to establish
  • The tax reporting requirements for companies are far greater than for sole traders and partnerships
  • There are capital gains tax disadvantages for holding assets
  • Splitting income isn’t as easy as in a family trust
  • Minority shareholders have little say in the running of the business

4.    Trusts

If you operate your business as a trust, you’re:

  • A trustee
  • Responsible for holding property or income for the benefit of others (beneficiaries)

The most common variety of trusts is a discretionary trust. If you’re the trustee of a discretionary trust, you have the power to decide how the profit will be distributed among the beneficiaries.

Advantages
  • A trust has limited liability if the trustee is a company
  • It has great asset protection benefits, as you control nt own assets
  • A trust has perpetual existence and does not cease with the death of a beneficiary
  • You can split income with a family discretionary trust and save a fortune in tax at times
Disadvantages/Things to consider
  • Like a company, a trust is more expensive and potentially complicated to establish
  • It can be expensive to complete the required tax and administrative paperwork each year
  • Profits distributed to children under 18 may be taxed at higher rates
  • Losses remain in a trust

In conclusion, no matter what industry you may be involved in, it is critical to be aware of the differing entities and what each option means to you. In particular, when starting your own business, the wealth of information available about business structures can be overwhelming.

Your best bet is to keep matters simple and stick to the basics and ask yourself some key questions.

What benefits are you looking for?

What tax policies and legal implications make the most sense for your operations?

At Wealth Safe, we’re here to help you with all your asset protection, tax planning, business structuring and superannuation needs. We work with you to find the best strategy to keep your assets safe, slash your tax 100% legally, and put more money in your pocket.

Please feel free to visit us on our Facebook page at www.facebook.com/WealthSafePtyLtd for more interesting articles, and tricks to reduce your tax and protect your assets.

To contact us, and get your complimentary copy of your book on how to slash your tax and protect your assets, complete our web form by clicking here. Or call us on 1300 669 336. One of our staff will be glad to assist you.

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