If you are planning to make a fortune, perhaps you should consider your business structure before you give away half of it in taxes.
According to the ATO, the particular structure chosen needs to be appropriate to the business owner's specific circumstances and take into account likely events in the future (such as getting married, having children or admitting new partners).
The structure of a business will affect:
- how much tax your business has to pay
- how other businesses deal with you
- your administration costs
- your level of asset protection.
The most common structures used by Australian businesses are:
- sole traders
- partnerships
- companies
- trusts.
Sole traders
Sole traders are taxed in exactly the same way as individuals.
A business enjoying good profits can expect to pay tax at the higher marginal rates. There is no asset protection if you are a sole trader so beware of 'creditors and predators'.
Partnerships
Partnerships are often preferred by husband-and-wife businesses and also where personal services are provided.
They have a simple and cost-effective structure, but their major disadvantage is that they offer no asset protection. Partners are each personally and separately liable for the debts of the partnership should the business fail.
Companies
A private company (with 'Pty Ltd' at the end of the business name) is the most common business structure for operating entities, particularly where capital gains are not likely and where the small business capital gains tax concessions will not apply. Unlike sole traders and partnerships, companies have limited liability, although personal guarantees may be required by directors from time to time.
Loans (or debts forgiven) by private companies to their shareholders are generally treated by the ATO as unfranked dividends assessable in the individual shareholder’s income tax return.
Trusts
Using a family trust is an excellent way to minimise the overall income tax liability for a business. A trust can also help with managing assets and liabilities, as well as offering flexibility for estate-planning purposes.
Family trusts are not directly taxed. Instead it is the beneficiaries of the trust who are subject to income tax on their share of the trust's net income. Beneficiaries also have the ability to obtain the full benefit of any small business capital gains tax concessions and franking credits.
A company is often used to act as a corporate trustee of a trust so that the personal assets of the business owners have some form of protection from any future claims made against the entity.
Where partners are likely to be admitted, the business could be run through a unit trust with the respective units being held by a family trust.
If a business, via a family trust, is deriving substantial income and all of the individuals are on marginal tax rates in excess of the corporate tax rate (currently 30 per cent), consider establishing a corporate benefi ciary to limit tax to the corporate rate.
Make sure you start your business with the right structure - if you have to restructure down the track costs such as income tax, stamp duty and legal fees can become expensive.