Deciding on the proper business structure is not just a formality—it’s a foundational choice that can dictate your business’s growth trajectory, tax obligations, and legal exposure.
Whether you’re a sole trader ready to hire your first employee or a café owner planning your second location, selecting the ideal structure is crucial for your future success. Providing a pathway for sustainable growth for any small business.
The Foundation of Your Business
The structure you choose influences everything from daily operations and taxes to liability and expansion ability. It’s about laying the groundwork that will protect you and enable sustainable growth and flexibility through economic changes.
Four common business structures are:
Sole Trader;
Partnership;
Company;
Trust.
Common Business Structures: Pros and Cons
Sole Trader:
This simple and cost-effective structure might be a good start for tradespeople planning to hire a few employees. As a Sole Trader, your business will be managed and operated under your name, making it easy to set up and much cheaper than other structures. However, as the company grows, it may limit flexibility and expose personal assets to business risks.
Partnership:
It is ideal for two or more individuals who want to manage a business together, like two chefs opening a new café. It’s straightforward but comes with shared liability, meaning you’re not just responsible for your actions but also your partner’s, even if they had no knowledge and/or were not responsible for the debt. Because of this, it is crucial that you consider who you enter a Partnership with and that there are clear agreements in place.
Company:
A separate legal entity that provides asset protection and might suit a store owner looking to open multiple locations. It allows for scalability and protects personal assets from business liabilities, with profits taxed at a corporate rate, which could be advantageous as the business grows.
A small business trading as a Company is taxed on earnings at a flat rate of 25% if the turnover is less than $50m and 80% or less of its assessable income in that income year is ‘base rate entity’ passive income—that means income from company dividends (other than non-portfolio dividends), franking credits, non-share dividends, a trust, interest, royalties, and rent.
Often, the sole purpose of operating as a Company is to protect the family home (or other assets) from business debt collection, even if the house is transferred to the spouse who is not the Director.
Trust:
Although complex and costly, a trust can offer significant protection for business assets and flexibility in distributing profits among beneficiaries. This might suit business owners who want to safeguard their assets while planning for future generations.
A trust can be structured in several ways, which will determine how the entitlements are determined and distributed. Due to its complicated nature, it is best to seek professional advice when setting up a trust structure.
Key Considerations When Choosing a Structure
Asset Protection: As a sole trader, your assets are vulnerable, whereas a company or trust can offer more robust protection.
Tax Efficiency: Understanding how different structures are taxed can significantly affect your take-home profit. For example, companies enjoy a flat tax rate which could be beneficial as your earnings increase, whereas sole traders pay tax at personal income rates, which can be higher.
Flexibility and Compliance: Companies and trusts face stringent regulatory requirements but offer more expansion flexibility than sole traders or partnerships.
Cost: Initial and ongoing fees can vary dramatically between structures. Sole traders and partnerships are cheaper to establish and maintain, while companies and trusts require more investment in setup and administration.
Making the Right Choice
Choosing the best structure for your business involves more than just comparing costs. It requires a strategic evaluation of:
Your Business Goals: Are you aiming to expand rapidly, or maintain a steady, manageable size?
Risk Profile: How much personal risk are you willing to accept about your business activities?
Investment Needs: Will you seek significant external funding or plan to grow organically?
Operational Complexity: Are you prepared to manage the administrative duties of more complex structures like companies and trusts?
Navigating the decision to structure your business is not a journey you need to take alone. Lift Accounting & Advisory is here to guide you through every step, ensuring your choice meets your current needs and supports your future ambitions. With our expertise, you can make an informed decision that positions your business for long-term success.
Remember, the structure you start with isn’t set in stone. As your business evolves, your structure can adapt to new challenges and opportunities. Let’s lay the foundation for your success together—contact Lift Accounting & Advisory today for personalised advice tailored to your unique business scenario.
