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Business structure implications

By CCIWA Editor 

When starting up a business, choosing the right structure can have implications on the amount of tax you pay, your level of personal liability and whether or not your personal assets are protected from litigation. 

The Small Business Development Corporation defines the most prevalent business structures in Australia as sole trader, partnership, company, trust and co-operative. 

Mandatory reporting requirements and extra costs can vary depending on which business structure you choose. 

Executive Chairman of full-service accounting firm Pitcher Partners Perth Bryan Hughes says while choosing the right structure should be a key consideration before starting a business – it’s also important for existing businesses to correct their structure if things aren’t working. 

“It’s a really important consideration, no matter how far down the track you are because at some point the wrong structure can bite you,” he says.

“Some of the most important implications are around taxation, for example, and you want to make sure you’re minimising your tax obligations. There’s also personal risk issues – so quarantining risk is a really important part of the business structure.  

“So between a sole trader, a partnership, a trust or an incorporated entity, the latter two structures most minimise risk to individual shareholders or beneficiaries and potentially can minimise risk to directors, as long as they are complying with their obligations under the law as directors.” 

The structure should also allow an easy exit when the time comes, with too many people not taking their exit strategy into account when they are setting up.  

“Whether the exit be positive or negative, they need to have thought this through,” warns Hughes. “That could require multiple entities depending on what their business is, where their assets are held, and what the type of assets are acquired over the period of owning their business.”

It’s good practice is to review your structure each time you make a substantial change in the business, or when you make a material acquisition such as a new business or property. 

The questions you need to consider include: 

  • Am I acquiring this asset in the right entity?  
  • Do I want to hold this asset in its own entity out on the side somewhere to gain risk mitigation or tax and exit-strategy benefits? 

“For example, if you are buying a property for your business, there could be many reasons why you might want to hold that in a trust with a corporate trustee. The benefits of those arrangements should be discussed in detail with your accountant,” Hughes says.

“We have a lot of clients starting businesses, starting new divisions of businesses, acquiring new divisions or acquiring new businesses. So structuring is the first question that is addressed along with tax implications and due diligence implications.”

“You have to look at how a change fits in the current business – are there risks associated with it, are there additional benefits that you want to keep separate from your existing assets and the rest of your business?” 

It can be a balancing act between not wanting to overly complicate your affairs as well as considering that more entities will mean you are up for more compliance costs. 

“But weigh that up with those other matters – such as risk and tax – and ask yourself if you think those things warrant having the additional cost of another corporate structure or another trust,” Hughes says. 

When starting up a business, choosing the right structure can have implications on the amount of tax you pay, your level of personal liability and whether or not your personal assets are protected from litigation. 

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