When commencing your business is the ideal time to get your structure correct. If you start off in the wrong structure the costs of correcting it can be extreme.
The most common entities available when starting a small to medium size business include, companies, discretionary trusts, a sole trader or partnerships of the above combinations.
When choosing the most effective structure, a number of factors should be considered.
1. Legitimate Tax Minimisation.
In most cases a discretionary trust is the best structure to reduce the tax you pay. The advantage of a family trust is that tax is paid by the beneficiaries. In general a beneficiary could be anyone, normally however you would not use a beneficiary outside your family group. The benefit of using beneficiaries is that you have the discretion each year to decide who pays the tax, thus making use of family members in lower tax brackets.
The benefit of operating as a company is that when you are in a higher tax bracket you pay tax at a flat rate of 30% as long as you are not drawing down on profits. It should also be noted that a company could be used as a beneficiary of a discretionary trust.
Having the correct structure could save you thousands of dollars yearly in payments to the tax man.
2. Asset Protection.
Another major consideration when in business is how to protect your assets such as your family home from the risk of being sued. If you’re running a business as a sole trader the assets that you own are more exposed to the risk of being sued. A company offers a greater level of asset protection as your personal assets are separate from the business. A trust can give the same increased level of asset protection when the trustee is a company that owns no assets.
It should be noted however that in today’s times no structure is completely safe and as a business owner you should always ensure that you have the appropriate insurances in place.
3. Access to Capital Gains Tax Advantages upon Sale of a Business.
Even though when you start your own business you probably haven’t given any thought to its potential sale it should still be a consideration when determining your operating structure. As a sole trader or discretionary trust you will potentially be entitled to the 50% capital gains concession as well as the small business concessions.
As a company most capital gains tax concessions are available, however in some cases they will need to be paid out as an unfranked dividend with the top rate of tax being applied.
Having the correct structure can save tens of thousands of dollars down the track when your business is sold.
4. Will you be performing any work for Government Organisations?
Today when setting up an entity, its important to consider if you’ll being performing any work for government departments. In recent times government departments have become more reluctant to deal with discretionary trusts with corporate trustees. This is because many government departments have archaic paperwork that does not recognise trusts. As well, government organisations have recently found it harder to sue trusts with a corporate trustee.
5. Getting full value for Superannuation Deductions.
If you are operating as Sole Trader and wish to make contributions towards superannuation, the first $5,000 is tax deductible, then 75% of the amount after that up to the age based limits. In a trust or company you have the ability to pay yourself a wage and salary sacrifice superannuation contributions. The benefit here is that the full amount of your contributions towards super are tax deductible up to the age based limits.
In summary there are many factors and other entities than those discussed above to consider when deciding how to structure yourself when going into business, the above is just a brief overview. Most importantly you should ensure that you get the correct advice from a professional.