Running a successful business involves more than just hard work and perseverance; there’s a lot of legal, administrative, and financial matters to deal with. Before starting a business, you need to decide which business structure best suits your needs. You’ll then know what income you need to declare and any deductions or losses you can claim. While there’s no substitute for professional advice from an accountant, an overview of your options to help you work out the most appropriate structure is a good start.
The four main business structures used by businesses in Australia are:
– Sole Trader
You can change your structure when necessary, but as you move from a sole trader to a trust, the costs and complexity increase.
This is the simplest business structure, where the business has no separate legal existence from you as an individual. You need to report your business income on your personal income tax return, along with any other income. You can be a sole trader with employees, but all aspects of the business are your sole responsibility. After year one, you generally pay quarterly pay-as-you-go (PAYG) instalments toward the amount of tax you expect to pay at the end of the year. You pay the same tax as the personal income tax rate.
Advantages: there’s less paperwork, they’re cheap to set up, and you keep all the profit.
Disadvantages: you’re legally responsible for the business, including debts, so any creditors can go after your private assets
As a partnership, you start a business with two or more people and legally share profits and losses according to your partnership agreement. You have to submit a separate partnership income tax return. Partnerships don’t have to pay PAYG instalments, but as individuals you may be liable to pay instalments on the share of income you receive.
Advantages: they’re cheap to set up, you have support from others, and you share financial and legal responsibilities
Disadvantages: like a sole trader, you are responsible for the business, so your assets are unprotected
A company is a more complex business structure – a distinct legal entity that is separate from its shareholders. It must have its own bank account and pay its own income tax. The money the business earns belongs to the company, and any profits are taxed at a flat rate. If you’re paid by the company, you still pay individual income tax on those earnings. The amount of tax a company is liable to pay is reduced by any PAYG instalments paid throughout the year.
Advantages: a company has better access to capital, and shareholders aren’t liable for the business debts, so your personal assets are safer
Disadvantages: running a company involves more responsibilities, with higher administrative and running costs
As a trust, the business is transferred to a third party that has legal control and holds income or property for the benefit of others, known as beneficiaries. A trust must lodge a separate income tax return. If your trust is a discretionary trust, the trustee can decide how profits are distributed among beneficiaries.
Advantages: you have increased asset protection
Disadvantages: tax rates that apply to undistributed profits can be high, and there are formal annual administrative tasks for the trustee
For the most up-to-date information, visit the Australian Tax Office website or phone their helpline. If you’re not sure which structure suits your business best and to find out more about your tax obligations, get advice from an accountant, financial advisor, or other business advisor.
If you are interested to explore further on this topic you can always set up time to connect with us by clicking here http://www.businessfreedomgroup.com.au/10k-session/
Photos from www.inmagine.com/