Do you need help structuring your business? Getting your business structures right is an important part of asset protection, estate planning and tax planning.
When we look at business structuring from an accounting perspective, what we’re looking at is the legal entity that your business trades through. In Australia, broadly, there are a handful of examples of the type of business structures that you can use:-
A sole trader is you trading as yourself. So, in my case, Ben Walker is trading as Inspire Accountants. We don’t like that idea for 2 reasons. The first one is asset protection, there is just no protection against your assets if your business is in your name. Secondly, the tax outcome is pretty limited in your ability to plan for tax because all the income ends up in your own name, regardless of if there could be opportunities to spread that around your family group.
We like to put ‘Partnerships’ in the same spot as ‘Sole Traders’, when it comes to asset protection and tax planning. As a partnership, the income goes to each of your names, and with asset protection, you’re trading as a person. And the other disadvantage of partnership is that you’re responsible for the other person’s decisions, and they can make irrational ones or ones that you don’t agree with, and you’re essentially bound by them in the partnership. So, when it comes to business structuring advice, we don’t like partnerships and sole traders. What we do like is ‘Companies’ and ‘Trusts’.
In a company, you’ve got a fixed rate of income tax. For companies that turnover less than $50 million, if they’re a business, you’re looking at a tax rate of 25%. But, if you’re turning over more than $50 million, that is a tax rate of 30%. Asset protection is also applied to the company because the company’s assets are treated as a separate legal entity, or the company itself is a separate legal entity compared to the directors of the company. And that is called ASICs corporate veil.
Often, when we think of business structuring we’re talking about trust. We’re looking at Family Trust or Discretionary Trust. They are great from a tax perspective if you have a family. The discretionary trust means you have the discretion every single financial year of where the profit ends up. And therefore, where the profit goes, that person pays the tax on their behalf.
There are some rules for certain industries and certain business types where you are limited by what you can spread within your family group. But generally, they are one of the most flexible business structures when it comes to tax planning.
And if they’re set up correctly, they offer the asset protection benefits that a company does as well. But, it has to be set up correctly for that to apply, and we’ve seen some pretty disastrous outcomes when it comes to structuring either a company or a trust in terms of asset protection.
In terms of when you should set up a structure, I recommend every business that is in for the long run sets up with the ideal structure from the start.
That might be an initial structure to get up and running, and then they could change structures a couple of years down the track or at certain revenue milestones. There are no hard and fast rules around this. And it does apply to the growth plans and the direction of the business as to when the structure might have to change. But, you can restructure once you get started, but it can be expensive to do so from a stamp duty perspective, capital gains tax perspective and even accounting and legal fees as well. You might be up for a few thousand dollars to set up the new structure, plus, it could be thousands to get the accounting and legal done and a valuation. You will have to pay for that to get the restructuring carried out.
Some of the restructuring can be very beneficial, especially to long-established businesses where we can see benefits around succession planning, estate planning, and even throughout the restructuring getting some potential tax benefits as a result of that.
If you would like to speak to an accountant and explore business structuring opportunities, you can book a ZERO-cost initial chat.
A company PTY LTD signifies that something is a company which stands for ‘Proprietary Limited. If you want to speak to an accountant about a company business structure, you can book a ZERO-cost,
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