When starting a business in Australia, one of the most crucial decisions you'll make is determining the right business structure. This decision affects everything from tax obligations and legal responsibilities to the ability to bring in new shareholders and plan for the future. A well-thought-out structure can help you minimise taxes, avoid legal pitfalls, and set the stage for future growth, succession, or even exit. On the flip side, poor planning can lead to significant financial and operational consequences down the line.
Here, we’ll explore some key factors to consider when choosing the right structure for your business in Australia, and why this decision deserves careful thought.
1. Taxation and the ability to distribute dividends and profits
Tax is one of the primary considerations when deciding on a business structure. Different structures are taxed in different ways, and understanding these differences is vital for optimising your business’s tax efficiency.
- Sole Traders and Partnerships: These structures have the advantage of simplicity, but they can result in higher personal tax rates because profits are typically taxed at your personal income rate.
- Companies: A company is a separate legal entity and is taxed at a flat rate of 30% (or 25% for base rate entities, depending on turnover). This can be beneficial for businesses with significant profits, as the corporate tax rate may be lower than personal tax rates.
- Trusts: A trust structure allows profits to be distributed among beneficiaries, potentially enabling tax-effective income splitting. However, trusts are complex and require careful management to ensure compliance with taxation laws.
Careful planning ensures that your business can distribute profits in the most tax-efficient way, enabling you to maximise earnings while staying compliant with tax laws.
2. Shareholding and flexibility to bring on additional shareholders
As your business grows, you may want to bring in new investors or partners to fund expansion or share the risks. The flexibility to bring on additional shareholders is therefore an important consideration when selecting a structure.
- Companies are ideal for this purpose as they allow for easy issuance of shares. This means you can bring in new shareholders without complicated legal processes, making it a preferred option for businesses looking to grow through external investment.
- Partnerships and Sole Proprietorships are less flexible when it comes to bringing in new partners or investors. In these cases, you may need to form new partnerships or restructure, which can be cumbersome and costly.
By selecting a structure with growth flexibility, you can future-proof your business for additional funding or strategic partnerships without the need for complicated reorganisations.
3. Considerations regarding your age, succession, or exit plans, and Tax concessions into retirement
As a business owner, it’s important to think about what happens to your business when you're ready to retire or move on. This is particularly true for those nearing retirement or those considering an exit strategy. The structure you choose will play a key role in facilitating a smooth transition, both in terms of succession planning and any associated tax benefits.
- Companies can provide a clear structure for succession. The transfer of shares is typically simpler and more straightforward than transferring ownership in other structures. However, you’ll need to ensure your company’s governance is clear and robust, allowing for a smooth transition of power.
- Trusts can offer valuable succession planning benefits, particularly if you have family members you want to involve in the business down the line. Trust structures can help protect assets and pass wealth on to the next generation with minimal tax implications. However, managing a trust requires careful oversight to comply with legal obligations.
- Capital Gains Tax (CGT) Concessions: One of the biggest advantages of properly structuring your business for succession is the potential access to tax concessions when selling or transferring the business. The Small Business CGT Concessions can reduce the capital gains tax liability when you sell your business, making it crucial to plan for retirement or an exit strategy well in advance.
Planning ahead for your eventual exit and ensuring the business structure aligns with tax relief options can save you substantial amounts of money in the long run.
4. Other ConsiderationsThere are several additional factors to keep in mind when choosing your business structure, including:
- Liability: Different structures offer different levels of liability protection. For example, a company limits the liability of its owners to the amount they invest, whereas sole traders and partnerships carry unlimited liability. This can impact your personal assets and should be considered if your business carries significant risk.
- Administration and Compliance Costs: More complex structures, like companies and trusts, come with higher ongoing compliance costs. You’ll need to keep detailed records, file annual returns, and meet other legal obligations. While these structures offer benefits, they also require more time and money to maintain.
- Control: Consider how much control you want to retain. A sole trader or partnership offers complete control, while a company requires a board of directors. If you value autonomy, a simpler structure might be the right choice for you.
The consequences of poor tax structuring
Choosing the wrong business structure can lead to significant financial and operational consequences. Poor tax structuring can result in higher taxes, legal costs for restructuring, and potentially adverse impacts on your ability to attract investment or sell your business in the future. For example, if you’ve started as a sole trader and later want to bring on investors or sell the business, you may find that you need to restructure to accommodate shareholders or to reduce your tax burden – all of which can be expensive and time-consuming.Additionally, a poorly structured business can leave you exposed to unnecessary liabilities or miss out on potential tax advantages that could significantly reduce your overall tax burden.
Conclusion
The importance of planning for the right business structure cannot be overstated. From minimising tax obligations to ensuring flexibility for future growth and succession, the structure you choose sets the foundation for your business’s success and sustainability. Take the time to consult with a business advisor or tax professional who can help you navigate the complexities and choose the best structure for your goals. With careful planning, you can avoid the costly pitfalls of poor tax structuring and set your business up for long-term success. Get in touch with the team at Maze Advisory Co today to start planning or reviewing your business structure, ensuring your business is optimised for maximum returns.
