Choosing the best business structure for you
One of the first considerations for the setup of your business is choosing the best tax structure for you.
- Sole Trader
- Trust – discretionary, fixed & hybrid
- Company (Pty Ltd)
TRADE OFF OF RISK, COST, COMPLIANCE AND RECORD KEEPING
Risk protection, cost of set up and operating, level of compliance requirements and record keeping requirements are the main trade offs between the main types of entities. Below is a graphical representation of the level of risk protection, cost, compliance and record keeping to compare structure types. You need to consider all aspects of your business in deciding which are the most important elements for your particular circumstances.
Tax Advantages and Disadvantages
As varied as the risk, costs, compliance and records of these business structure types is the advantages and disadvantages for tax purposes. Firstly we’ll discuss the more simple structures – sole traders and partnerships. In terms purely of tax savings, a family or husband and wife partnership allows income splitting as opposed to a sole trader for the husband, which can substantially reduce tax. This is beneficial in cases where the wife doesn’t have external employment or any other income sources. However this is subject to the rules of Personal Services Income, or PSI (visit www.ato.gov.au for explanation) which may mean that the profits of the partnership still have to be distributed all to the husband if he is the only generator of income from personal exertion. You need to speak to your accountant to see if this applies to your particular circumstance.
Moving into the more complex structures of trusts generally allows you to have discretion over who gets taxed on the profits (again subject to PSI rules and depending on the type of trust). If you have a family with children over 18, you may be able to split the trust profit to more than just husband or wife, and you (where allowed by the trust deed) may also be able to distribute to other companies, trusts and relatives in your family group. Of course the more you split, the lower your taxable income, and the lower your tax liability. Be wary that if you do distribute to others, the trust is liable to pay that cash distribution at some point to that entity.
Companies are another step up in the compliance area, and accordingly the tax savings are only available if it is used in the correct manner. Usually for directors to get cash out of the company they are required to be paid a wage, which is subject to withholding and super just like any other employee (read what do I have to know to employ someone?). The only other way is declare dividends, but these are not a tax deduction to the company. Companies are best where cash is intended to be kept in the company and you want to take advantage of the 30% tax rate. Individuals however do not reach an average rate of tax until earning in excess of $90,000 (approx) and hence its only after this income level that a company tax rate becomes beneficial.
For a more personalised comparison of structures suitable for you, please email [email protected] or arrange an appointment.
This fact sheet is provided as general advice and does not cover every possible situation and related consequence. Further investigation should be done in relation to your own particular circumstances with an appropriate professional, and hence Startusup accepts no liability for actions carried out that rely on the information provided in this fact sheet.