There are a number of key decisions that need to be made when starting up a new business. Structuring your business is something that should not be taken lightly so it’s important you analyse all options available before deciding.
The business structure you choose will ultimately affect the tax you pay, options available for tax planning, your set up costs and your personal liability if something was to go wrong.
The four main business structures available are:
This is the simplest business structure available and the most common choice for those starting a business. Operating your business as a sole trader means the income of the business is treated as the person’s individual income. If the business makes a loss, the tax losses may be offset against other sources of income from the taxpayer.
On the downside, operating your business as a sole trader means that the business income will be added to your employment income. This could mean that tax is paid at a higher marginal rate when the combined amount is over a certain amount.
Operating your business as a partnership means carrying on your business with one or more other people as partners who receive joint income. A partnership is not a separate legal entity meaning it does not pay income tax on the income received by the partnership; rather, each partner pays tax on their share of net partnership profit.
Whilst operating as a partnership means that the workload is shared, it also means that business partners are jointly liable and individually liable for the actions of other partners.
Running your business as a company allows your business to operate as a separate legal entity that is capable of holding assets in its own name. The two main advantages of operating your business as a company are the flat tax rate of 30% and the fact that a company has limited liability.
On the other hand, the cost of establishing a company can be high and the reporting requirements can be quite complex.
A trust is run by its trustee for the benefit of the trust’s beneficiaries. A trust does not pay tax, rather, each year the profit is distributed to the beneficiaries who pay tax. The discretionary trust is the most common variety of trust as the trustee of the discretionary trust has the power to determine how the profit will be distributed among the beneficiaries.
There is no right or wrong way to structure you business, rather there are advantages and disadvantages for each type of structure. Depending on the industry you are operating in and whether you are in business with yourself or with a partner are two of many factors one must consider before determining the best structure. As your business grows, you may need to re-evaluate your structure depending on your plans for the business’ future.