When starting a business, deciding on the appropriate structure is key.

The size and type of your business, and how you want to run it will be factors in your decision.

There are commonly four types of entity – sole trader, partnership, company or trust – and each will affect aspects of your business such as the amount and flexibility in determining tax payable, asset protection, and costs to set up and maintain the entity.

Making the right decision at the beginning is critical.

Here’s a look at different corporate structures you may consider for your business:

Starting out as a sole trader

This is the way frequently chosen by most fledgling businesses, and especially by contractors.

Establishing and operating the business is straight forward and start-up costs are low. Compliance fees are also minimised and only one tax return is required. Charging GST and the preparation of BAS returns are not required until your turnover exceeds $75,000 per annum.

However, there are drawbacks. There is no distinction between the trader and the business, and personal and business assets are intertwined. You therefore have much less legal protection from creditors or lawsuits and both your business and personal assets can be targeted.

From a tax perspective, the amount paid will depend on the income earned and be subject to personal tax rates. When income is low, this is suitable, however for the 2021 financial year, the tax rate from $45,000 p.a. onwards will be above company rates.

As a sole trader, your capacity to raise finance is also limited.

Going into partnership

A partnership consists of two or more individuals and, as with a sole trader set-up, this too can be a low-cost way to start a business.

Compliance fees are low, establishing and operating the business is simple, and it is relatively easy to wind down the business.

However, this structure provides no asset protection, and all partners may be liable for debts incurred by any individual partner. This can be a considerable risk.

Tax returns and financial statements are required for the partnership along with individual returns for each partner. As with sole traders, no GST or BAS is required where your turnover is below $75,000.

In this set-up, the capacity to raise finance may also be limited.

A partnership is legally whatever the partners want it to be, but should be clearly defined in a written agreement to avoid disputes down the track.

Moving on from small beginnings

As a business grows it may progress from a sole trader or partnership structure into a company or trust. Each has their own benefits and drawbacks which should be carefully considered at the time of set up.

Family circumstances are a consideration, as are capital gains tax (CGT) implications if the plan is for future sale of the business and access to small business concessions.

Forming a company

Forming a Proprietary Limited (Pty Ltd) company effectively makes your business a separate legal entity from you which provides legal protection and tax planning opportunities, but comes with responsibilities to manage, in respect to the distribution of earnings and other areas.

Your personal assets are protected from liability in most instances and only your company assets are at risk in the event of any legal actions and company debts.

It gives you the ability to raise capital and transfer ownership by selling shares to another party and tax rates are more favourable, with a 26 per cent flat rate applicable to most small business entities for the 2021 financial year (reducing to 25 per cent for 2022). This can be lower than personal tax rates and is particularly useful where the intention is to reserve funds to further build the business.

Company earnings can be distributed by way of dividend to shareholders and come with tax credits to the individual for company tax paid.

This structure is however more complex and comes with annual compliance costs associated with financial statements and taxation return preparation, along with corporate secretarial fees.

A more complex trust

A trust is a legal structure to hold assets and can be a Unit or Discretionary/Family Trust structure, depending on stakeholders involved.

A trust can be established to hold business assets, with a trustee appointed to manage them. Commonly, the trustee is a company, and the trust can then provide asset protection and limit liability.

Trusts are quite flexible for tax purposes, particularly where there is an expectation of future capital gains. It should be noted that trusts are not taxed in their own right, with trust income distributed annually and taxed by beneficiaries which may result in higher tax. Their use should be carefully considered and implemented only after receiving appropriate advice.

A trust is a more complex legal structure than a sole trader or partnership and is expensive to establish. It is also more difficult for a business to retain working capital within a trust structure.

Combinations of corporate structures

Depending on your circumstances, the above corporate structures can also be used simultaneously for different aspects of your business.

In particular, trust and company structures can be used together to provide the best combination of commercial standing, asset protection, taxation opportunities, and long-term strategic flexibility.

Need help with business structures?

Navigating the right choice of structure can be complex, and should be matched to your business goals and strategy. It is critical to get this right at the start to ensure that commercial risk and tax exposures are appropriately managed.

LDB Group is well placed to assist with setting up appropriate company structures and can guide you through the process. We also offer complementary services including superannuation advice, business insurance advice, entrepreneurial assistance, tax compliance advice, and more.

Simply get in touch by calling (03) 9875 2900 or send us details via the contact form below.