A fundamental decision when starting a business is choosing a business structure. The most common types of business structures in Australia are:
- Discretionary trusts
- Unit trusts
Each type of business structure has its advantages and disadvantages that need to be considered when deciding which structure suits the size and type of business and your personal circumstances best. Here are some factors to consider when choosing a business structure:
- TAX LIABILITY
The structure you choose may affect the tax you are liable to pay.
Trusts do not pay tax to the extent the income of the trust is distributed to beneficiaries. Beneficiaries pay income tax on their entitlement to trust income. Undistributed income is taxed at the highest marginal rate. Discretionary trusts also allow the trustee great flexibility to stream income to achieve the best tax result with the 50% capital gains discount.
The company tax rate of 30% is lower than the top individual marginal rates and allows profits to be accumulated easily without further tax. However, the 50% capital gains tax discount is not available to companies.
A partnership does not pay income tax on profits, rather each partner pays tax on the share of profit they receive.
- ASSET PROTECTION
Each business structure provides a different level of asset protection.
Under a discretionary trust the trustee has the ability to quarantine assets from its beneficiaries. Property held by a person as trustee cannot be taken by creditors in bankruptcy or liquidation unless the debt is a debt of the trust.
In a partnership the lack of a separate legal identity means each partner is jointly and severally liable for the debts of the partnership.
Companies possess limited liability which means that any claims creditors have over the directors are limited to the shares they own in the business.
Trusts allow control to remain in the family and it is easy to hand over control of the business to members of the family.
The director of a company may have his or her limited in control in that the company which must be run in the best interests of the shareholders.
Partnerships are relatively easy and inexpensive to establish and run, and are easy to finance with the contributions of several partners.
Companies and trusts require more set up costs and companies can be more expensive to maintain.
If you need advice about the best business structure to use for your business, call us today and we can examine your individual circumstances and provide you with legal experience about your best options.
About the author:
This article has been authored by Claudia Giovannini at Lynn & Brown Lawyers. Claudia is currently studying law at UWA and hopes to be admitted as a Perth lawyer in or about 2018.