‘I thrive in structure. I drown in chaos.’ – Anna Kendrick
Building and property development relies heavily on laying a strong foundation.
As you know, the foundation is the most important part of the entire structure. It holds it all together. If the foundation is weak, it will fail. When it does, cracks will appear internally and externally. Windows and doors will become misaligned. Floors will become uneven, slope and even crack. These problems multiply as you go up to the next floor and so on. The result? Disaster.
While the foundation itself will differ depending on whether you are building a single storey property or a multi-level development, every jobneeds the strongest foundation for its particular purpose.
It is no different when it comes to your business – you need the right foundation for your needs. Whether you are in carpentry, electrical or plumbing; residential, commercial or industrial properties; a sole business owner or in a partnership and more. The same principle applies: you need the right structure. The benefits of having the right structure are that it saves you money by reducing the amount of tax you need to pay; it gives you flexibility when it comes to distributing profits and adding or removing partners; it enables you to grow without any adverse effects; and it gives you peace of mind, knowing that you are set up not only for today, but for well into the future. If you don’t have the right structure, on the other hand, it could cost you your business. Ideally, you want to get your business structure right from the beginning.
To do this, first you need to understand what your options are. Second, you need to know about the key considerations that you should keep in mind when choosing the right structure for you.
The basic structures are as follows:
Individuals. This is when you run your business as a sole trader. This is the simplest ownership structure and is how most businesses get started. It suits the smaller business and the net profit you generate is less than $80,000 per annum.
Partnerships. A partnership is when two or more parties join forces to establish a business. However, it doesn’t pay tax, as any income it generates is divided between the partners and recorded as a part of their personal income. Similar to the Individual structure, only spread across the partners.
Companies. A company is a structure that is most used for businesses, with one of the main benefits of this structure being the tax on profits. The general company tax rate is 30 per cent, however, the company tax rate for small businesses (businesses with aggregated turnover of less than $10 million) is only 27.5 per cent. For this reason, it is a popular choice for businesses with high levels of income. It also provides flexibility in the number of owners, otherwise known as shareholders.
Trusts. A trust is similar to a partnership or a company, in that it’s a separate legal entity used to own assets and/or operate a business. Any income generated is distributed to beneficiaries, which is then recorded as part of their personal income. While there are different types of trusts, the most popular is the discretionary trust, otherwise referred to as a family trust. This particular trust has added tax benefits, as you have the discretion to distribute the net income any way you wish and therefore can choose to give more income to beneficiaries who are on the lower tax rates. In addition, the incorporation of a company trustee will provide personal asset protection.
Superannuation funds. The final option is running your business through a self-managed superannuation fund (SMSF). An SMSF is not prohibited from running a business, however, there are many activities that are prohibited or limited when operating under this structure. Many of the mainstream business types in building and construction are not suitable for this type of structure. However, a property development business that is operated for the sole purpose of providing retirement benefits for the members might be suitable. Even still, due to the significant legal restrictions, I would strongly recommend seeking specialist advice if considering operating such a business within a self-managed superannuation fund.
So how do you know which structure you need? There are a number of factors to consider when choosing a structure. Some of the key ones are as follows:
Asset protection, Tax minimisation, Control, Active or passive income, Cost, Ease of administration, Adaptability, Succession planning
Generally, the structure should take care of itself, as long as all the above factors have been considered.
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Tony Dimitriadis B.Bus CPA Director
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