When clients come in to see me about starting a new business they have many different questions depending on the type and size of business they are commencing and their own understanding of business.
One of the more common questions is; what type of entity should I use?
There are several different entities, or business structures, that can be used to run a business. These are, sole trader, partnership, company and trust. Some of the advantages of being a sole trader are; simple and cheap to set up, simple to operate, the owner is in 100% control of the business.
A family partnership has generally the same attributes as a sole trader, however the spouse of the business owner becomes a partner allowing income to be split. A partnership with an unrelated party is different again, and has the disadvantage of each partner being liable for the other.
A family trust has the advantages of income splitting, and discretionary distributions. It will also have security of assets if there is a corporate trustee.
Some advantages companies have are; being a separate legal entity and having limited liability. A company also has tax advantages.
When a small start-up business enquires about business structures, we analyse the proposed business and recommend an appropriate business structure. However, the most common response is to commence business as a sole trader. The reason for this is it is cheap and simple. The reality is the business may not be successful, as a sole trader it is also simple and cost effective to cease business. If the business is successful, your accountant should be keeping track of your progress and advise you when it will be advantageous to re-structure the business.
Always seek the advice of your accountant if you are thinking about starting a business.
By Mark Vernal from Success Tax Professionals Rockingham