Choosing the right business structure is a key decision for anyone running a business, whether it’s small or large. This decision doesn’t just apply when you start the business but can also be important throughout its operation, as there may be advantages to changing structures over time.
There are four common ways to structure a business: as a sole trader, a partnership, a company, or a trust. You can also combine these structures, like having a partnership of companies or trusts. Each structure has its own benefits and drawbacks, especially when it comes to legal and tax implications.
For example, in a partnership, all partners are “jointly and severally” liable for the business’s debts, meaning you can be held personally responsible for all debts, even those incurred by your partner. However, partnerships involve fewer legal formalities than companies and offer tax benefits, such as the ability to split income between partners in a tax-efficient way. In addition, any losses made by the partnership can be used to offset other personal income, which is helpful in the early stages of a business when losses are common.
In contrast, companies and trusts retain their losses until they can be applied against future income. Companies must also meet strict rules, like maintaining continuity of ownership, to claim losses. Family trusts, on the other hand, allow for flexible distribution of income among beneficiaries in a tax-effective manner, while companies and unit trusts offer less flexibility.
It’s worth noting that business structures can be changed at any time without negative tax consequences, provided certain conditions are met. For example, if you start as a sole trader or a partnership, you can transfer your business to a company or trust without incurring taxes, as long as you continue to control the business as the beneficial owner. The same applies when moving a small business into a discretionary trust, provided ownership remains unchanged.
Even if changing the structure triggers a capital gain, the small business capital gains tax (CGT) concessions often allow you to reduce or eliminate the gain by reinvesting in a new business.
If you're considering restructuring your existing business or starting a new one, it’s important to seek professional advice to understand
the best structure for your needs, taking into account all the potential tax advantages and legal considerations.
