Business Structures

Business Structures

This is critical to set up the right structure at the beginning. The tax implications are enormous if the wrong structure is set up and you will also miss out on many tax deductions with the wrong business structure & can have capital gains tax problems when you sell your business. The available structures are as follows:

  • Family Trust
  • Company
  • Partnership
  • Sole Trader

Family Trust

Advantages

  • Limited liability can be gained by setting up a corporate trustee.
  • Asset protection.
  • Travel allowance possible without substantiation.
  • Afternoon teas, morning teas and light lunches for employees and clients are tax deductible.
  • Can distribute income of $416 to your children (under 18 years old).
  • Income, including capital gains, earned by trust can be distributed among family members.

Disadvantages

  • Cost (if have company as Trustee) approximately $ 2,000 to set up and additional annual costs of $ 400.
  • Losses trapped in Trust.
  • If you receive a salary from your trust you must pay 9 % superannuation.
  • If Corporate Trustee must lodge Annual Returns to ASIC.
  • Unpaid Present Entitlement

Company

Advantages

  • Low tax rate – 28.5%
  • Limited Liability.
  • Travel allowances possible without substantiation.
  • Afternoon teas, morning teas and light lunches for employees and clients are tax deductible.
  • Easy to sell and pass on ownership.

Disadvantages

  • Cost – Approximately $ 1,700 to set up and additional annual costs of $500.
  • Losses trapped in company.
  • Division 7A – Deemed Dividend provision.
  • Lose active asset exemption capital gains benefit when company is wound up or when you take the money out of the company.
  • If you receive a salary from your company you must pay 9% superannuation.
  • Capital gains tax rate is 28.5%.
  • Must lodge annual returns to ASIC.
  • Inflexibility – Can only get profit out of a company by paying dividends to shareholders or by paying wages.
  • Use up small business retirement exemption much quicker than a trust and may be forced to sell shares in company rather than the business in order to access future tax free amounts in excess of $500,000.
  • Cannot pay fully franked dividend in first year that the company makes a profit if company has not paid franking deficit tax before 31st July & lodged a Franking Account Return. If shareholders haven’t paid themselves a wage they may lose the benefit of their 30% tax rate in this first year. This may also create debit loan problem. However this can be overcome by paying a fully franked dividend next year after the company has paid the previous year’s tax & before the company lodges its tax return.

Partnership

Advantages

  • Simple and inexpensive to set up.
  • Easy to dissolve.
  • Partners are not employees. No superannuation or workers compensation requirements.
  • Partners can share in business losses.

Disadvantages

  • Joint and several liability of partners.
  • Changes to ownership can be difficult and generally require a new partnership to be formed.
  • No travel allowances or meals as a tax deduction.
  • No distribution of profits to family members that are not partners.

Sole Trader

Advantages

  • Simple set up and operation.
  • Easy to change structure if business grows.

Disadvantages

  • Unlimited liability.
  • Little opportunity to split income.
  • No travel allowance or tax deductable meals.
  • No distribution of profits to family members.

 

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