Often we see business owners who are directing focus to business operations and they haven’t stopped to reflect if their existing business and personal structure still best suit their circumstances.
Whether you’re in start-up phase or restructuring in a growth phase, choosing the right type of business structure can often be overwhelming as you have so many pro’s and con’s to work through. Most commonly, the focus is on asset protection and ownership, start-up and ongoing admin costs and tax implications.
1. Asset Protection
The most effective way to protect your assets is through a Company or Trust structure, primarily due to them being separate legal entities from their owners – therefore responsible for their own liabilities.
Operating a business through a company structure means there are clear distinctions between business and personal assets. However, in the unfortunate event of liquidation or litigation, a director can be held personally liable for certain obligations such as GST, PAYG withholding and compulsory super guarantee.
Trusts can provide the same level of asset protection, provided that a corporate trustee is in place instead of an individual trustee.
2. Start-Up and Ongoing Administrative Costs
Incorporating a company can be directly done through the ASIC or a private service provider (e.g, accountant) who would charge professional service fees in addition to the registration fee you must pay to the ASIC.
Setting up a trust can be complex, legal assistance is required in creating a trust deed in order to create a trust. There will be additional costs if incorporating a corporate trustee – to limit the liability.
Company or Trust structures certainly have ongoing annual expenses that must be paid to remain complaint. Every year, financial reports must be prepared and a tax return lodged – meaning costly bookkeeping and accounting fees. Furthermore, Companies are required to pay an annual ASIC review fee to keep registration active and sign off on the company’s ability to repay debts on time and in full. Discretionary Trusts must complete Trust Distribution Resolutions before 30 June each year.
3. Tax Implications
To decide on the most effective business structure, you will need to consider the nature and extent of your business operations as every structure has distinct tax implications.
For example, during 2023 and 2024 financial years, profits generated in a Company are taxed at a fixed rate of either 25% or 30%. Sole Traders earning the same amount of income are taxed at their marginal rates – can be as high as 47% including Medicare Levy!
In a Discretionary trust, the trustee has the ability to distribute income and capital gains to different beneficiaries who are taxed at their own marginal tax rate.
Capital Gains Tax (CGT) Discount: if an asset is owned for at least 12 months, you can reduce the capital gain on the sale by 50%, given the asset is owned in a Trust, Sole Trader or Partnership (partners hold an interest in each partnership asset as an individual). Unfortunately, Companies don’t get the 50% discount, however they can be eligible for small business CGT concessions.
Whilst changing your business structure can now be done almost instantly, it is important to note tax implications may arise when making changes (e.g Capital Gains Tax). There are several concessions available to small businesses that would enable transfer of assets without incurring tax liability, however specific eligibility requirements need to be first met.
Author
May Aung
