New Business Set-Up and Business Structure Advice Dandenong
Author │ MAS Tax Accountants Dandenong
When commencing a business, it is imperative to select the structure which best suits your needs. There are 4 types of business structures available:
Sole Trader:
A sole trader refers to an individual operating a business in their own right (can trade under a trading name). It is a simple business structure which provides the owner with all decision making capabilities. A sole trader will use own TFN, have an ABN and may have other tax registrations such as GST. Some key points to consider include:
- Low set-up costs and easy administration.
- Minimal compliance obligations.
- Owner maintains control and direction of the business.
- Access to CGT discounts.
- Tax is calculated at owner’s marginal tax rate because income is treated as personal income. This can be disadvantageous if profits are significant.
- Unlimited liability on the owner.
Partnership:
A partnership is an arrangement whereby two or more entities (individuals, companies, trusts etc.) operate a business together with a view to make a profit. The partnership will have its own TFN, ABN and may have other tax registrations such as GST. Partnerships will generally have an agreement which outlines the conduct of the business including profit share arrangements, arrangement for salaries, admission or retirement of partners etc. Some points to consider include:
- Minimal set-up costs.
- Ability to contribute different assets (i.e. cash, knowledge) to the business.
- Access to CGT discounts.
- For taxation purposes, a partnership is treated separate entity. Although it does not pay tax (profit or loss is attributed to partner’s income), a partnership must lodge a tax return to declare profit or loss for the period.
- Tax losses (if any) are available to partners subject to non-commercial rules.
- Partners are joint and severally liable for all debts of the partnership at all times.
Company:
A company is a separate legal entity, distinct from its owner/s (shareholders). Companies are governed under Corporations Law which is governed by ASIC. Companies must keep ASIC up to date in regards to company details, change in directorship, changes in shareholders, and must pay an annual review fee per annum. The company will have its own TFN, ABN and may have other tax registrations such as GST. Some points to consider include:
- Companies offer asset protection through limited liability.
- Companies are taxed at 28.5% regardless of the amount of profit.
- Losses remained trapped in the company and can’t be passed onto shareholders/directors.
- Set-up costs are high compared to sole traders and partnerships.
- No CGT discount available.
- Greater amount of compliance compared to sole traders and partnerships.
Trust:
A trust is a relationship where property is managed by one or more persons or entities (trustees) for the benefit of one or more persons or entities (beneficiaries). The trustee is the legal owner of the property while the beneficiaries have an interest in it. The trustee is obliged to distribute the income and capital of the trust according to the trust deed. The trust will have its own TFN, ABN and may have other tax registrations such as GST. Some points to consider include:
- Distribution of income and capital will depend on what type of trust (as well as trust deed) is created.
- Trusts can provide a tax benefit in the form of income splitting (not all income can be split)
- By having a corporate trustee, trusts can provide a similar level of asset protection.
- CGT discount are available to trusts.
- Undistributed profits are taxed at the highest marginal rate. Trust income will usually be distributed to beneficiaries and therefore tax at marginal rates of the beneficiaries.
- Set-up costs are high compared to sole traders and partnerships.
- Losses remained trapped in the company and can’t be passed onto beneficiaries.
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