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Business Structures 101

Posted 5 May '15

Last week we shared with you our “top 3” items for starting a new business.  We thought it might serve you best to elaborate on each one a little further.

Let’s start with Business Structures

The structure you operate your business from provides the foundation for your compliance, reporting, tax implications, personal asset protection and legal obligations. The best way to ensure you make the right decision on your business structure is to know the advantages and disadvantages of each. From there we can choose the one that best suits your situation.

There are 4 common types of business structures…

  1. Sole Trader‘An individual trading on their own’

This is the cheapest and easiest form of business structure. A Sole Trader limits your expansion options and leaves you open liability wise as there is no legal separation between the business and you.  What this means is if the business gets into financial hardship, say with creditors or the ATO, they have the legal right to go after your personal assets (such as your home) to pay those debts.

  1. Partnership ‘An association of people or entities running a business together, but not as a separate legal entity’

Again this is a cheap and easy alternative and allows for more than one person to be involved in a business. However, the same personal liability issue arises as with the sole trader.  Partnerships can be risky business though as each partner is equally responsible and liable for the decisions of the other partners.  Therefore, if you have a partner who goes rogue you may be held personally liable for their dodgy ways.

  1. Trust‘An entity that holds property or income for the benefits of others’

Trusts were very popular back in the day as they allowed for asset protection as well as flexibility for tax purposes.  The ATO have tightened this up in recent years but that doesn’t mean that trusts are no longer useful.  Trusts are not a separate legal entity in their own right, the legal responsibility lies with the trustee of the trust (which can either be a company or individual). Don’t be afraid to Trust the Trust though, whilst they may be a bit more costly to establish and administer, they remain to be a great tool to minimise tax and protect your assets.

  1. Company ‘A separate legal and trading entity’

A Company will provide you with the greatest level of legal separation and asset protection.  The operations of a company are controlled by the Directors and ownership lies with the shareholders. A Company also allows for the capping of the income tax rate at 30% so can help out with some tax planning strategies if and when needed. Naturally the costs are higher due to the greater regulations and administration but these costs can absolutely be worth it to protect your home!

Which one is right for you….

Choosing the right structure for you will depend on a number of different factors such as the size and type of business you wish to operate, your personal circumstances and whether you intend on growing the business. Seeking the correct structure advice (from professionals like us!) will allow you to ensure you have ticked all the boxes to beginning a business that best fits your personal and professional needs!

 

 

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