Choosing the Right Structure For Your Business
Choosing a structure is one of the most important decisions you must make as a prospective business owner. The risk of getting it wrong can be catastrophic and costly to unwind.
When setting up a business structure, consideration should be given to factors such as how many people will be involved in the business, what the business will do and the intended growth of the business.
These factors should be applied to determine the optimal structure:
A person can carry on a business on his or her own behalf. The income earned as a sole trader is taxed at the same rate as individual tax payers.
This simple structure has lower establishment costs. The main disadvantage to this structure is that a sole trader is personally liable for all business obligations.
Two or more entities can carry on business in partnership, where the income and expenses are jointly shared. Each partner pays tax on their share of the net partnership income.
A critical downside to this structure is that the partners are severally and jointly liable for the partnership’s liabilities.
Under a trust, a trustee owns the assets of the trust and carries on the business on behalf of the beneficiaries. A trustee can be an individual or a company. A formal Deed is required to set up a trust.
A trust provides flexibility in income distribution for tax, which can be streamed to beneficiaries on a lower marginal tax rate. Assets can also be protected through an effective Deed.
A company is a separate legal entity capable of holding assets in its own name. A company is owned by shareholders and directors manage the day to day business affairs. Shareholders limit their personal liability, with the financial liability being limited to the company assets.
There are costs associated with incorporating a company and ongoing compliance obligations.
Each business owners’ circumstances are different and as such, we suggest speaking to your Traction adviser about the costs, risks and benefits of each structure to ensure you use the right one for your needs going forward.