Business Structuring – Assessing your Options

Finance & Insurance

If you are starting out in business, how you structure it at the outset will have a lasting impact on your efficiency, profitability, liability and risk.

Small businesses can be operated via a number of different entity structures, including:

Sole Trader

• The sole trader category is a suitable entity for small-scale “micro” business operations employing the personal talents of the proprietor.
• It is a scalable option that allows you to change structure as your business grows or easily wind it up if needed.
• It is the simplest to set up and generally less costly to maintain.
• There is no need to apply for a separate Tax File Number.
• Net Income of the business will be taxed in the owner’s hands.
• The owner of the business is personally liable for the debts of the business and all of the owner’s personal assets are at risk should something go wrong, as they can be used to recover a business debt.

Partnership

• Partnerships have long been an effective way of conducting business operations, with another person or a number of people
• A separate Tax File Number will be required for the partnership.
• The partners can be jointly or separately liable for the actions of other partners so this should be considered when deciding who/what entity should act as partner.
• The partnership net profits are divided between the partners and each partner pays tax on their share.
• To avoid any disagreements, it is desirable that every partnership has a written Partnership Agreement, which sets out the terms and conditions of that partnership.

Trust

• Trusts can be created to hold property or business assets for the benefit of others, known as beneficiaries.
• The most common types of trusts are:
  • Discretionary Trusts – where the profits of the trust are distributed to beneficiaries at the sole discretion of the Trustee.
  • Unit Trusts – where the profits of the trust must be distributed to the beneficiaries in the same proportion as the number of units held by each beneficiary.
• A Trust Deed outlines how the trust will operate.
• The trustee/s are responsible for all aspects of the day-to-day management, investment of monies etc., relating to the trust. The trustee/s can either be a company or an individual/s. The trustee/s has potentially wide legal and trust responsibilities for the administration of the trust.
• Trusts are generally more costly to set up, run and maintain.
• A separate Tax File Number will be required for the Trust.
• Generally the beneficiaries of a Trust are not liable for the debts of the Trust, however the Trustee/s may be.
• Profits from the trust are generally distributed to the beneficiaries and taxed in their hands.
• Income generated by the Trust and its distribution must comply with rigorous and complex Taxation Rules.