The company structure is the go-to vehicle for most Australian small business owners and for good reason. But what are the alternatives and what structure is best suited to your business?
The following is a brief outline of the options and those for whom they may be appropriate:
- Sole Trader or partnership
- Good when you first start or if you are looking for simplicity, low costs and little red tape.
- Company structure
- For business owners primarily concerned with asset protection
- A joint venture structure
- Will appeal to a business owner who is concerned with attracting capital and/or investments; and/or
- who has the need to collaborate
- A discretionary trust
- Will attract business owners looking for the most tax effective income
- Franchise structures
- For business owners is seeking to implement system and back-office support.
There are a number of business structures and models, but for most SME’s in professional services, it is our experience that a proprietary company (possibly owned by a discretionary trust) provides the right balance of familiarity, accountability, flexibility and control.
Because they are relatively inexpensive to set up and run, partnerships and sole traders are an acceptable business structure while a business is in its infancy and has little or no commercial value. However, once you start engaging with a greater number of clients and entering into commercial contracts, the owners of these structures will find they are taking on greater risks and personal liability (jointly and severally, in the case of a partnership).
A company on the other hand, is a separate legal entity governed by directors who are appointed by the members, known as the shareholders. Registration with ASIC and the need to lodge a separate company income tax return are a small inconvenience compared to the advantages that this structure may offer the business owner, including:
- limited liability (subject to personal guarantees or other security provided by the company or its directors),
- access to a 30% corporate tax rate,
- flexibility to add and remove investors/owners (best managed through a clearly articulated shareholder agreement),
- the ability to apportion ownership and control between members (again, best managed through a shareholder agreement); and
- the ability to quarantine valuable business assets (including stock and IP) into separate holding companies that are not exposed to the risk-generating business activities.
This being said, a corporate structure does not provide a complete escape from the potential personal liability. See our article on Directors’ Duties and Responsibilities for more information (link).
- When deliberating on the structure for your new business (or a business to be acquired) it is critical to consider how you will exit the business and when this exit will occur. Although the choice of structure should not be exclusively driven by tax minimisation, a failure to consider this issue at the outset could result in you paying tax at a much higher rate during the business operation and upon your exit.
- When you start or purchase a business, you may not be in a position to pay for or create elaborate structures to minimise tax and risk. Even though you may start out as a sole trader or partnership, you should seek to review your structure often and consider the evolving needs of the business over time. It is important to consider transitioning to a more effective structure (such as adding a discretionary trust to hold assets) as your business grows.
Useful links for SME start-ups:
Useful checklist for many of the day-to-day regulatory and legal issues you’re likely to face in your business: https://business.gov.au/planning/business-plans/starting-a-business-checklist
Online decision matrix designed to assist you to choose the best structure: http://fs2.formsite.com/diirdwebteam3/form263/index.html
A one-stop tool designed to help you find all the local, state and federal licences, registrations and permits you need to operate your business. https://ablis.business.gov.au/pages/home.aspx
The information provided in this article is general in nature and does not take into account your own specific circumstances. You should seek legal advice from a lawyer with recognised expertise in your industry prior to acting on any of the issues discussed.
If you want advice as to how to which structure is best for you, please contact our Corporate and Commercial team for advice.