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 – The first consideration when choosing your business structure is how you can best protect your personal assets, like your home, your car and so on. Running a business can make your personal assets vulnerable in a number of ways – should you ever get sued by a client, partner or supplier; when you need to borrow money from a bank or other trading partners; and should something happen to you as the owner.
- Tax minimisation – When it comes to structuring your business to minimise tax, there are two areas to consider – your business’s taxable income and any potential for Capital Gains Tax (CGT). If your business derives a taxable income, then minimising income tax will be an important factor when choosing your business structure. If your business derives income that is considered capital, then planning to minimise CGT is important. Income that would be considered capital is the profit made when you sell an asset.
- Control – Ownership and control are not the same thing. It is important you understand the difference and how it may impact you moving forward. Control is when a person, or group of people, have a controlling interest (more than 50 per cent) across two or more businesses. Control is not limited by the type of structure that you operate in, meaning the different businesses could be operated as a sole trader, partnership, trust or company.
- Active or passive income – The type of income you earn will also influence your structure, and is linked to the tax minimisation strategies you use. Your income might be active, passive or both. Active income comes from a trading business, such as a building company, while passive income comes from investment activities, like having an investment property that earns rental income.
- Cost – All structures will incur a cost, whether that is the cost of setting up the structure, registrations, ongoing renewals and the cost of tax and accounting. Generally, the more complex the structure, the higher the cost will be to set it up and maintain.
- Ease of administration – A complex structure that involves various layers will have more compliance issues attached to it, than a simpler structure. Unfortunately, there is no one-structure-fits-all-scenario. Therefore, your particular circumstances need to be taken into account. Trading businesses generating income are best kept simple. Remember, the KISS (Keep It Simple Stupid) philosophy.
- Adaptability – Having a structure that can provide flexibility can be of great assistance as your business grows and changes. Changing market conditions and changing legislative provisions can require that a structure be altered, whether in a small way or completely.
- Succession planning – None of us like to think of a time when we won’t be around anymore, but this needs to be considered up front so you can plan for it effectively. Whether you plan to sell your business on your retirement, leave your share to your partners or hand it on to your children will influence the type of structure you choose. It’s also important to consider what you would like to happen should you pass away while you are still holding the reins. You need to consider who will control the income and assets of the structure and how this control could be changed, if required.
Generally, the structure should take care of itself, as long as all the factors have been considered.
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