Written by: Jason Holt, Senior Accountant
Choosing a business structure for your new enterprise is an important step in your initial startup phase, which involves selecting an entity through which you want to operate your business.
Structuring not only affects things such as income tax, succession planning, business expansion, capital gain, and compliance obligations but it helps to understand your vision and goals, reduce potential risks, secure future financial investments, develop marketing strategies and build a brand.
There are four main types of entity structures, sole traders, partnerships, trusts and companies.
1. Sole Trader
Sole Trader is a used when you own and operate a business by yourself. It is the simplest business structure to operate under and the cheapest. It has the least compliance obligations; however, it exposes the operator to the most risks and tax is paid by the operator at the taxpayer’s marginal rate.
Partnership is similar to a sole trader however it involves a joint venture with another party. Each person contributes funds, labour and skills. The profits and losses are shared between the partners and like a sole trader the individual will pay tax on the income they receive (not the partnership).
Trust is the third structure type. The day-to-day operations are performed by the trust however the trust has a boss called a trustee. The trustee can be either an individual or a company. Like a partnership, no tax is paid by the trust, rather the profits can be split between the beneficiaries and it is the beneficiaries that pay tax. The biggest advantage to a trust business structure is that the profits can usually be split between the beneficiaries at the discretion of the trustee.
A company is the last business structure. A company is a separate legal entity from the owners. It is controlled by directors and answerable to its shareholders. There are more tax compliance obligations, is more expensive to set up, ongoing fees are higher, and the company pays tax on the profits not the owners. However, a company offers more protection from potential risks, aids in company expansion and the tax rate is capped at 25% (doesn’t matter if you make $1 or $1m).
If you are starting a new business, it is essential to structure your enterprise officially.
At Greenhalgh Pickard, our team of integrated professionals can assist you in all areas of business. This ranges from Accounting, Commercial and Property Law, Litigation, Employment Law and even business marketing, assisting you from day one.
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The information contained in this article is for general informational purposes only and is not intended to provide legal advice or substitute for the advice of a professional. This information does not consider your personal circumstances and may not reflect the most current legal developments. Should you need advice, please contact our firm for targeted information relating to personal your situation.
Greenhalgh Pickard’s Accountants