Insights – FAQ’s – What structure should I use for my new business?
One of the most common questions we are asked by people starting out in business is “What structure should I use?”
Most people know that common structures to operate a business include sole trader, partnership company, discretionary trust, or unit trust and many already have a basic idea of the differences in how they work.
Sometimes those new to business have been advised by friends, family or a neighbour that they should be using a particular structure – because that’s what they have for their business.
The truth is that there is no one size fits all and the best structure for YOUR BUSINESS will depend on YOUR BUSINESS. Your ideal structure might actually be a combination of entities that work together to give you the best outcome.
There are a number of factors to consider when making the decision, and the difficult thing is that each of those considerations might lead you in a different direction, so you need to consider the overall picture and your own personal priorities before coming to a final decision.
- Asset Protection:
Running a business creates a level of risk and protecting personal assets from creditors or potential legal action is often a priority and choosing the correct structure to operate a business or to own assets is almost always a consideration in choosing the correct structure. Each different type of structure provides a different level of protection for you. For example a company ensures limited liability for shareholders by capping the extent to which they are liable for their company debts.
- Tax minimization:
No one likes paying more tax than they need to and so in most cases this is an important consideration. The correct structure to minimize tax will depend on your personal income levels, your family situation and your expected business profit so each of these things will need to be examined. A company operating a small business will be taxed at 25%, but an high income individual might be paying 47%
- Cash requirements:
The amount of funds you personally need to live on from the business will also help to determine the optimal structure. Some structures allow the profits form the business to be accessed easily whereas for others cash may be more difficult to access at a personal level and drawing down can have additional tax consequences.
- Capital Investment
You may need to obtain finance for your business from a bank or external investor. Some structures provide more options and make it easier to obtain funding than others.
- Cost v Benefit:
Setting up structures have up front as well as additional ongoing compliance costs. It is important to consider the benefit of using a particular entity type in comparison to these additional costs.
- Future Plans
The structure you use will determine the processes required to bring others into the business or transition the business either to the next generation or to an unrelated party as part of a business sale. Although you are just starting out you should consider if down the track you may be likely to consider bringing in other parties to share ownership of the business and what your thoughts might be in regards to your estate planning or exit strategy. While structures can change down the track there are usually additional costs associated with restructuring including additional taxes so consideration of longer term goals can also be important.
Some industries need special licenses, permits and regulations to operate and are required to trade under a particular structure. Certain industries will also have specific taxation or compliance considerations that may change the structure choice. For example, medical and other professionals have limited ability to split income due to rules such as PSI and construction companies that are subject to QBCC requirements may prefer particular structures to avoid more complicated reporting requirements.
Your residency for tax purposes or location of your business will also help to determine the type of structure that you use. If you are a non resident or you business is overseas, there may be legislation or varying tax outcomes that will change your decision.
In summary, deciding the best structure for you is not always simple and your choice of structure can impact on the business in a number of different ways. You must weigh up the competing priorities and sometimes you may need a combination of different structures to ensure your optimal business structure.
How Can Alto Help?
We recommend speaking to an accountant prior to making a decision. Should you like to understand your best structure or even need a second option feel free to chat with one of the Alto team.
Author: Donna Bruce