How To Choose A Business Structure

How To Choose A Business Structure

When you’re starting your business, one of the things you must do is to choose your business structure. It’s a little dry, but it’s key and doing it upfront is important. You can change your business structure down the path, but that can be costly with changes in admin, branding, and so on. Getting your business structure right from the beginning is key.

What’s important about your business structure?

There’s a few factors, one being your asset protection. You’re going into business, it’s risky, and you want to make sure your assets are protected. We’ll talk about different structures that can do that.

When you go into business, you’re taking risks. Part of that risk you want to be rewarded for. One way you can do that is by using a tax effective structure. It’s not dodging tax, it’s just working in a tax effective manner. You need to comply with your operational requirements, and different structures are suited to different operations. Today we’ll talk about some of the most common structures, but there are alternatives like public companies and joint ventures, which can suit different types of businesses. We’ll concentrate on the most important and common ones.

This blog forms part of the Sofra Partners Business Start-up Video Series. This 10 video series is designed to help you get your start-up off on the right foot! If you would like to access all the videos and templates in the series, just click here.

The types of business structures…

We’ll start with a sole trader. This is the most basic of structures. It’s you going and getting your ABN and starting a business. It’s good, but it comes with some limitations. Firstly, there’s no asset protection. You are the business, so if your business gets into trouble, be it financially or you have some sort of litigation, everything you own is on the line. There’s absolutely no asset protection for being a sole trader. Also, from a tax effective point of view, there’s not much we can do with share and profits. Sole trader has its purpose and is really good for small businesses, particularly if it’s someone starting a business on the side. As soon as you want to get more commercial, you need a more complex business structure.

Next is a partnership. This is just like a sole trader with a lot of those same benefits and drawbacks, and it’s fairly cost efficient. It’s about you or multiple entities, you and another person, you and a company, two different entities coming together. It is often used by life partners, but it’s not so good if you will be going into business with someone that’s unrelated to you, because you are liable for their liabilities and they come liable for yours. The losses get carried on for tax and you can use that against your other income, so like a sole trader, there is some opportunity there, but it’s still basic.

The company is the first of the corporate structures and it is a good one to go for. There is a cost in setting-up and an ongoing registration cost each year, but you get some important asset protection from it. A company can be sued and can sue. It’s an entity of itself, so it is liable for the operations of the business. Now, as a director of the company, you may still be liable yourself, but there are more protections compared to a sole trader or partnership. A company gets tax within itself, so it operates itself. You get money by dividends or wages. From a tax perspective, it’s good, but it’s harder to share the income between family members. A company is a great one to go for, particularly if you’ve got multiple people coming from different backgrounds, or unrelated parties coming into business together, as that’s often where the strength of a company comes in.

Finally, there is a trust. That’s the most complex structure. It has a trustee, which looks after the trust, which is often a company. A trust can come in many forms. Commonly it’s a discretionary trust, a family trust, so it’s about being in a family business. There’s also a unit trust, where multiple people can own units and it’s a more fixed income. Like a company, it offers asset protection. It also serves a purpose with units and unit trust, but it goes on for a tax benefit. For a family trust, you get to be able to distribute your profits to multiple individuals, so husband, wife, children, parents, family, or anybody that’s related to you or related entities. Whereas in a unit trust, profits go to the owner’s of those units. Generally speaking, the trust itself doesn’t pay tax, whatever profits go out to individuals, and then they get to deal with it in their own personal entities.

Choosing a structure is very important.

It is good to get it right up front because it can be inconvenient to change it later down the track. I do very much encourage you to seek professional advice when choosing a structure. You definitely need professional advice and assistance in setting one up if you do go down the track of a company or trust setup, but it is also good just to get advice on what suits your business the best and assessing risk profile. It is very important that you talk to a professional.

This blog forms part of the Sofra Partners Business Start-up Video Series. This 10 video series is designed to help you get your start-up off on the right foot! If you would like to access all the videos and templates in the series, just click here.