Business Structuring Advices

Need Help Structuring Your Business?

Getting your business structure right is not just a formality—it's a strategic move that can profoundly impact the future of your company. A well-chosen business structure serves as the foundation for effective asset protection, ensuring that your personal and business assets are shielded from potential liabilities. This is particularly important in today’s litigious environment, where even a minor oversight can lead to significant financial repercussions.

Moreover, a properly structured business can streamline your estate planning efforts. It provides a clear framework for the transfer of ownership and management responsibilities, minimizing disputes and ensuring a smooth transition to the next generation. This is essential for preserving the value of your business and maintaining its continuity, especially if it’s a family-owned enterprise.

Tax optimization is another critical benefit of choosing the right business structure. Different structures offer varying degrees of flexibility in how income is taxed, allowing you to minimize your tax burden legally. By carefully selecting a structure that aligns with your financial goals and business model, you can take advantage of available deductions, credits, and tax incentives, ultimately improving your bottom line.

In summary, the right business structure is a powerful tool that can significantly enhance your ability to manage risks, protect assets, and optimize tax obligations. It is a decision that requires careful consideration and expert advice, as it lays the groundwork for your business's long-term success and sustainability.

Understanding Business Structures

From an accounting perspective, choosing the right legal entity for your business is essential. In Australia, you generally have several options for business structures:

Sole Trader
Partnership
Company
Trust

Which Business Structure is Best for You?

Sole Trader

As a sole trader, you operate under your own name. It is not a separate legal entity. The entity itself is you. Whilst the structure is simple and easy to maintain, it has following disadvantages:

Asset Protection: There is no distinction between the personal assets and business assets. The scenario could be all your personal assets would be exposed to the business risk.
Tax Planning: All income is attributed to your personal tax return, limiting opportunities for tax planning and distribution.

Partnerships

Partnerships entities are formed between more than one natural or artificial persons. It is simple and cost-effective setup with shared responsibility and resources. Partnerships benefits from customizable agreements allowing the flexibility in how profits and losses are distributed. However following drawbacks to be considered:

Unlimited Liability: In a general partnership, each partner has unlimited personal liability for the debts and obligations of the business. This means that personal assets are at risk if the business fails or incurs debt. Partners are also jointly and severally liable for each other's actions, which means you can be held responsible for the actions and decisions of your partners.
Limited Lifespan: Partnerships can be dissolved if a partner leaves or passes away, unless otherwise stipulated in the partnership agreement. This can lead to instability and potential disruption of business operations.
Limited Tax Plannings: Since profits are distributed only between the partners, the tax planning may be very limited in terms of distributions of the profits.

Due to these limitations, partnerships and sole traders are less favorable for business structuring compared to companies and trusts.

Company

A company is a distinct legal entity that can own assets and operate independently, identified by "Pty Ltd" in its name. Owned by shareholders and managed by directors, a company distributes profits to shareholders as dividends and limits their personal liability to the company's assets. Governed by Corporations Law, companies require directors to act in the company's best interests. However, starting and maintaining a company involves significant administrative and compliance costs, along with a need for public disclosure of key information.

Fixed Tax Rate: Companies with a turnover of less than $50 million benefit from a tax rate of 25%. Those with a turnover above $50 million face a 30% rate.
Asset Protection: There is a huge benefits of asset protection as company structure is a separate legal. What this means is only the company on it’s own is liable for its debt. So, if the company can’t pay its debt, the creditors can’t come after the owners personal assets.
Limited Liability: Shareholders are typically only liable for the company's debts up to the amount of their investment, protecting personal assets.
Separate Legal Entity: A company is a distinct legal entity, which can enter into contracts, own property, and conduct business independently of its owners.
Capital Raising: Companies can raise capital more easily through the issuance of shares or debentures.
Perpetual Succession: The company continues to exist regardless of changes in ownership or management, ensuring business continuity.

Trust

Discretionary trusts are highly regarded for asset protection. Unlike other assets, a beneficiary’s interest in a discretionary trust is not considered personal property. This means that if a beneficiary faces bankruptcy or legal issues, the assets in the trust remain protected from personal claims.

Additionally, if the trust itself encounters financial difficulties or legal action, the beneficiaries are not responsible for covering any shortfall, similar to shareholders in a company. This dual protection makes discretionary trusts appealing: they shield assets from beneficiary-related claims and protect beneficiaries from trust-related liabilities.

In contrast, unit trusts and companies do not offer the same level of protection. If a unitholder or shareholder faces personal bankruptcy or legal trouble, their units or shares can be considered personal assets, leaving the trust’s assets more vulnerable. This asset protection benefit is a key reason many people choose discretionary trusts.

Tax Flexibility: Discretionary trusts allow you to distribute profits among family members, optimizing tax outcomes based on individual tax rates.
Asset Protection: When set up correctly, trusts can offer a great asset protection. However, improper setup can lead to significant issues.

12 Taylor Street, Yarraville
VIC 3013, Melbourne
hello@numbervisions.com.au
(03) 8087 9009

Quick Links

We Offer

Number Visions Accounting Pty Ltd. is a CPA Practice

Liability limited by a scheme approved under Professional Standards Legislation.