Tax Management & Compliance

Tax-Effective Structuring

When setting up a business, many new business owners tend to refer to what their friends, colleagues and associates have established in their business, without considering the implications of the structure for themselves.

There are 4 main types of structures that business owners will consider. One size does not fit all.

Some factors to consider when choosing the appropriate structure are:

• Entity tax rate
• Capital Gains Tax implications
• Can the entity distribute any profits?
• Does the structure provide Asset Protection?

Sole Trader

A sole trader is a person trading as the individual legally responsible for the business. While it may make sense for some to set themselves up as a sole trader, income tax will be payable at the individuals’ marginal rate of tax, which could be as high as 47%. Under this business structure there is also no protection for your personal assets, which means you’re personally liable if anything goes wrong in the business. 

Partnership

This structure is a group of two or more people (or trusts) in business that distribute income or losses between themselves. The partnership doesn’t pay income tax on its profits. Each partner pays tax on their share of the partnership profit at their own individual tax rate. Each partner is jointly and severally liable if anything goes wrong.

Company

This is a very common structure for businesses, as it doesn’t put personal assets directly at risk. The corporate tax rate payable is a flat rate of tax on the company’s profits. Under a company structure, profits are retained by the entity and there are limited options available regarding the distribution of funds from the company.

Trust

Trading through a trust is another option. It is a highly effective tax structure (especially for appreciating assets) and it can also provide asset protection. Unlike company structures, you can distribute trust profits to a variety of beneficiaries. The drafting of the family trust or unit trust deed by a lawyer or corporate secretarial service provider should allow the trust to distribute profits to the beneficiary of your choosing.