8 Reasons to Choose an Appropriate Business Structure

 One of the most important choices you make when starting a new business, is the type of legal structure you select for your business.

Your choice will impact:

  • Formation cost and ongoing administration
  • How much tax you end up paying
  • The amount of record keeping which is required by your business
  • The impact on your personal liability
  • The effect it has on your ability to raise money
  • Future needs
  • Flexibility
  • Asset protection

To further illustrate the impact of your choice of appropriate business structure, read below a real case study from our files –
Mr Joe Block* was running his carpentry business as a sole trader. He has 3 employees and made a net profit in excess of $180 000.

Disadvantages for the current structure as follows:

  1. Personally liable for all debts of the business.
  2. Unlimited liability of the owner
  3. No legal separation between business and private assets (personal assets are available to creditors/banks to meet the debts of the business)
  4. Taxation – all business profits taxed in the hands of the owner at marginal tax rates (up to 47%)

After reviewing Mr Block’s situation, we set up a company for him and managed to roll over his sole trader business into a private company structure. Although there are initial costs and higher annual fees payable,

The advantages for Mr Block are as follows:

  1. Separate legal entity from that of directors and shareholders, therefore reduced responsibility of business debts and other liabilities.
  2. Because a company is legal “person”, there is more flexibility in managing business affairs. 
  3. Profits can be retained and capped at the company rate of 28.5% for small business entities.
  4. There is the option to reinvest profits in company or to pay out as dividends to shareholders, therefore flexibility in distributing profits to shareholders.
  5. Dividends can be fully franked, so franking credits (tax already paid by company), will reduce the shareholders tax liability.
  6. Tax deduction is claimable for the director’s wages and other salary costs.

* name has been changed

On a final note:

The choice of business structure should only be made after due consideration of the advantages and disadvantages of various business entities and consultation with a business expert.

Audrey de BeerAuthor: Audrey de Beer –  Success Tax Professionals Franchisee