Business Structure: Start-up Businesses & Restructuring
There are many different business structure arrangements to select from, with ranging benefits and penalties depending on your situation. As an accounting firm, we, The Great Bean Counters thought we should provide a rundown for you. As a start-up or a growing company looking to restructure in the future you may be able to save on tax by selecting a particular structure, below are the four key options with a summary for you.
Sole Trader:
A sole trader is the simplest form of business structure and is relatively easy and inexpensive to set up. As a sole trader you will be legally responsible for all aspects of the business. You'll generally make all the decisions about starting and running your business and you can employ people. As a sole trader you are taxed as an individual, and therefor an individual income tax threshold applies.
Trusts:
A trust is a great structure for asset protection. It is ideal for holding investment assets such as shares and investment properties. However, a trust income is required to be distributed to beneficiaries for each income year. Therefore generally tax planning work and trust distribution minutes are to be prepared by each year end.
The taxing rate for a trust is dependent upon which tax threshold the chosen beneficiary is at. For example a father may have a trust with his son in which his income is $70,000 per annum and his son is on no income, in this situation if the trustee (in this situation we will say the father) chooses to distribute the income from trust held sources to himself he will be taxed at a rate of over 34.5% and potentially more if this moves his tax bracket higher as a significant income. However if his son receives the funds from the trust he will be tax free for that income for up to the threshold of $18,200. The allocated trustee or trustees can distribute the income from trust held sources however they please within the members of the trust. It should be noted that children under 18 years of age can only receive up to $416 trust income tax free, while those over can receive any amount.
Company:
A company provides limited liability and is a separate legal entity. It is an ideal form for asset protection as well. Income tax rates for companies were reduced from 30% to 27.5% in the 2017 financial year for small business entities with annual turnover under $10 million. This threshold for small businesses is projected to be reduced down to 25% within the next 10 years.
Partnerships:
If you would like to start a business with a business partner to reduce costs and share resources, partnership could be an ideal form for you. A partnership involves two legal entities or more. Each legal entity will be taxed accounting to how they are registered and their distributed income from the partnership. For example in a two way partnership one person may choose to hold their related share in a company and will be taxed as a company, while the other member of the partnership may hold as an individual and be taxed as an individual for their distributed income.
While all this may be a little hard to assume what model will be the best to register as, we are here to help you and wish to be by your side as you flourish with the best start or re-situating possible.
