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When starting a business, one of the first things to decide is what structure you will use to operate your business. Which one is going to provide the best flexibility and allow you to reach your future goals? Consideration should be given to tax implications, operational risk, legal costs and asset protection. The most used structures are sole traders, partnerships, companies and trusts.

Sole traders are the easiest to set up and operate. You manage the business in your own personal name, however, it has limitations once the business grows and becomes profitable. Profits are taxed at individual marginal tax rates. It is generally considered the best structure for tradies, small contractors, businesses that operate from home and most small business.

Partnerships usually comprise of two or more people acting and operating the business together. Partners in a partnership are also jointly liable for any debts the partnership may incur so it will be important to understand who you are entering into partnership with, with a documented, legal partnership agreement in place.

Companies allow for and can accommodate business growth. It is its own separate legal entity, operated by the directors of the company and owned by shareholders. There are various tax implications of using a company structure, some good and some not so good, though companies do pay income tax, currently at 25 per cent from the first dollar of profits.

Trusts can also own and operate businesses with either an individual or a company as trustee. That trustee is responsible for operating the business and distributing profits to its beneficiaries.  As a business structure, trusts can allow flexibility to distribute profits to beneficiaries to obtain the best tax outcome for a family group as a whole.

This advice is general and doesn’t take into account your personal circumstances, so discuss your business with your tax professional.

 

Karen Peall is the Executive Manager of Lyons Judge Bundaberg and has more than 20 years’ experience in accounts and taxation.