Have You Outgrown Your Business Structure?

Hundreds of thousands of businesses are created each year and one of the first questions new business owners must answer is this: which business structure is best for me?

 

Which Business Structure is Best for Me?

Each business structure has its benefits and its drawbacks, and the structure that works well for one business might be altogether wrong for another business. So how do you know which structure to choose? And if your business is already established, is it possible to change structures if the one you initially chose doesn’t seem to be working well now?

It’s best to work with legal or tax specialists when deciding which structure will work best for your business. In most cases, it’s possible to restructure your business even if it has been operating for some time. Let’s take a look at the pros and cons of the most common structures:

 

1. Sole Trader

If your business is small and relatively simple, this may be a good choice for you. Sole Trader businesses have very few legal and tax formalities to worry about during the setup of the business. For this reason, it’s inexpensive to start. 

Sole traders have full control of the business and, therefore, receive the full benefit of the profits. Sole traders are taxed personally, and they cannot share debts and losses. The biggest downside to operating as a sole trader is that your private assets are at risk if your business can’t pay its debts.

 

2. Partnership

Like sole traders, partnerships are inexpensive to set up. People who don’t want to shoulder the entire burden of a business often prefer partnerships to sole trader structures. With a partnership, you have great access to finances and other resources from the partners; however, you also share the profits with the other partners. 

With a partnership, you’re required to lodge an annual partnership income tax return for the business. Each partner is assessed on his or her own share of the business profits, and they’re jointly responsible for the debts incurred by the business. Like sole trader businesses, members of partnerships face the risk of losing their personal assets if the business can’t pay its debts.

 

3. Company

The Australian Securities and Investment Commission recognises a company as a legal entity, and that’s the main reason companies are preferred business structures.

A company is more expensive to establish than sole traders and partnerships, but it offers increased asset protection to the individuals involved with the company. Tax reporting requirements are more stringent, and profits are taxed at 27.5% or 30% depending on the annual turnover of the company.

 

4. Trust

Businesses may operate as trusts, and there are several different kinds of trusts to choose from. Like a company, a trust is more expensive to establish. It’s generally considered the most flexible income tax structure, and some people take advantage of the efficient estate planning opportunities that are available only for this business structure. 

Trusts require extensive administrative paperwork, and the taxes may be complicated. When the beneficiary dies, the trust can continue to exist, so this structure can be very helpful for businesses dealing with complicated family succession planning.

 

Why Change Business Structure?

Some businesses find that the business structure they start with doesn’t suit them anymore. For example, if a business starts out as a sole trader but quickly becomes a larger organisation with many assets and employees, the owner may want to restructure in order to protect his or her personal assets.

There can be many other reasons to change your business structure. Talk with a legal or tax specialist about your own situation to find the best structure for you.

 

How to Decide on Your Business Structure

It can be helpful to weigh each structure’s pros and cons against your current business. But try to look to the future as well. If you’re planning for growth, consider how your business structure will hold up under those plans. 

Again, it’s wise to discuss these issues with business experts who know the ins and outs of taxes, compliance, legal issues, and succession planning. If you’d like to talk with one of our business experts, reach out to us at Altus Financial. We’re happy to lend a hand.