In this blog we outline the very basics of different structures used for business in Australia.
We will cover the most common including pros and cons of each:
This is when you trade in your own name as an individual
- Cheap to set up – you just need to apply for an ABN
- Cheap compliance as you only need to produce a schedule in your individual tax return with a record of income and expenses
- You can add a trading name via ASIC
- All your assets are at risk should something go wrong with the business. Sometimes this is outside of your control e.g. A client doesn’t pay you so you can’t pay your bills. In this case, you have no protection personally.
- You have no flexibility with income distribution to minimise tax each year
Partnership (of individuals)
This set up is a partnership of 2 or more individuals where any profits are split equally between all parties. Note we highly discourage this set up other than possibly with a husband/wife due to the risks in this area.
- Cheap to set up – simply apply for an ABN in the partnership name
- Easy to add a Trading Name
- No assets of any partners are protected and the assets of partners can be taken to pay back the debts of other partners even if they are not debts related to the business. Basically, you are now all one big group of assets and debts.
- There is a restriction on income distribution as it must be equal to each partner
- Due to unrelated parties, we would advise full financial accounts are completed to ensure everyone is aware of how the business is going so there is still this cost the same as for other structures.
Note a partnership can be formed between Companies and this would provide some additional protection to partners.
Company (limited by shares)
This is sometimes called a ‘1-dollar company’ and is where a company is set up with ASIC. You are then bound by the Corporations Act and must adhere to their rules and regulations.
- A good set up for unrelated parties
- Provides a high level of asset protection to shareholders, the Directors take all the risk
- Provides flexibility for different ownership percentages through shareholdings
- Provides the ability to retain earnings in the company or pay out fully franked dividends to shareholders meaning there is some flexibility in income distribution (this can be enhanced by considering the ownership of the shares). This means you can for a period of time cap tax at the company tax rate (currently between 27.5% and 30% depending on situation)
- Easy to bring in other owners at a later stage by selling or issuing new shares
- Can access R&D concessions
- Cost to set up is generally around $1000+GST
- Cost of compliance for full financial reports to be prepared
- Income distribution is limited to shareholders – think carefully about who these are and how the shares are structured
- You will need a shareholder’s agreement if unrelated parties which can add to the cost significantly (but imperative to avoid issues down the track)
- Not ideal for buying appreciating assets as no discounts apply
Family/Discretionary Trust with a Corporate Trustee
This is a Family Trust with a Company as the Trustee. To briefly explain the set up the Trust itself is not a legal entity, but it is the entity that ‘trades’. The Company acting as the trustee ‘controls’ the trust and is responsible.
- Provides assets protection to all parties involved including some protection for the Director of the Trustee company. The set up creates some hoops should the worst happen with the business
- Provides for flexibility in distributing income to family members – an ideal set up for a family business unlikely to take on outside owners
- Can access the CGT 50% concession when assets held over 12 months e.g. Property, shares etc.
- Not ideal for unrelated parties
- Cannot gain access to the R&D offsets
- Must distribute all profit somewhere each year
- Cost to set up is around $2,000+GST as 2 entities required
- Often some confusion between which ABN to be used as many agencies don’t recognise the Trust and require Trustee (Company) details eg. QBCC, Workcover, some banks etc
- Additional cost for set up of extra entities if you wish to cap tax at the corporate tax rate (note there are other issues to consider here)
As you can see there are Pros and Cons of each entity structure and it will depend on your business type, plans for the future, people involved (or planning to be involved) which structure will suit you best. There are also other structures that can be utilized but these are the most common.
Make sure you check out the other blogs in our ‘Back to Basics’ section of our blog page.
This is general advice only and is not intended to be acted on without seeking professional, independent advice on your personal situation.