To start a business, choosing what business structure to use is crucial for your business. Deciding what business structure is perfect for your business is not an easy decision, but there are ways to make this choice that much easier to make.
The four common small business structures
First thing is that there are four structures that are commonly used for small businesses for; sole traders, partnerships, company, and family trusts that are effective to run your business venture.
When deciding on business structure, the following should be taken into consideration:
- Cost to set up and operate: assesses the standard accounting, legal and ASIC costs between the different options.
- Protection of personal assets: compares whether your personal assets can be protected from litigation against your business.
- Tax flexibility: assesses whether you may have the ability to split or smooth income to reduce taxes.
- Compliance complexity: compares the amount of tax lodgements required each year.
- Tax-effective retention of capital: assesses if you can retain profits in the business structure at a lower tax rate to be able to reinvest more money.
- Ability to add new shareholders: not all business structures allow you to introduce new business partners.
- Access to government grants: the government prefers giving grants to companies while tending to limit some other business structures from accessing grants.
For sole traders and partnerships, the facts listed above do not work as well for those two small business structures. But, for a company and family trust business structure it is the total opposite as the facts listed above work best for a company and a family trust business.
If you are considering using a Company as a business structure; you should be mindful of the following:
- PSI (Personal Services Income): So, if you make money from your own personal services (i.e., trading your personal time and experience for money), you must meet a set of rules (e.g., the results test, 80% client’s rule, etc.) before can split your income into a company. Otherwise, you’ll have to pay high tax rates.
- Another pitfall to operating a company is that Division 7A loans can bite hard into that money. Without talking to a consultant, your business could be at risk.
- Lastly, you shouldn’t use a company to hold all your assets because you could lose the 50% CGT exemption.
So, making the decision on choosing the right business structure is a difficult decision. You won’t know if you’ll be introducing business partners one day or if you’ll be applying for government grants or if you’ll be approached to sell your business for a crazy sum of money.
Feel free to contact Lana and her team at Matovic Business Accountants if you would like to discuss your business’ accounting and bookkeeping needs.
Email us at info@matovicaccounting.com.au or call (07) 3557 5721.
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