Comprehensive Guide to Business Structuring: Mastering Tax Planning, Asset Protection, and Succession Planning

As of 30 June 2023, Australia boasts a robust business landscape with 2,589,873 active businesses. The 2022-23 period witnessed a growth of 0.8%, translating to an increase of 19,973 businesses. This growth was fuelled by a 15.8% entry rate, accounting for 406,365 new businesses. However, as per the ABS, the period also saw an exit rate of 15%, resulting in 386,392 businesses ceasing operations.

Regionally, Queensland led the way with a net increase of 11,031 businesses, marking the most significant growth among all states and territories. In contrast, Victoria experienced a decline, with a decrease of 7,606 businesses, making it the only region to report a net loss.

For businesses to thrive in this dynamic environment, proper structuring is paramount. It’s not just about starting a business; it’s about setting it up for sustained success. Being well-versed in the legal and administrative aspects is key to ensuring compliance and unlocking growth potential. We have covered the four most commonly used structures in Australia in this article. We have provided detailed pros and cons of each structure so business owners can make an informed decision when they try to establish a structure for their new business.

1. Sole Trader

Starting as a sole trader is the simplest and most common business structure in Australia. According to the Australian Taxation Office (ATO) website, a sole trader operates as an individual, being personally responsible for all aspects of the business.

Pros of Sole Trader Structure for Small Businesses:

Ease of Setup: Registering as a sole trader for a small business is quick and straightforward, requiring minimal paperwork.

Full Control: Small business owners have complete autonomy over decision-making and operations, allowing for quicker changes and implementation of their vision.

Direct Profits: As a sole trader, business profits belong to the owner without the need to share them with partners or shareholders.

Flexible Taxation: Sole traders benefit from a simple tax structure, as business income is typically treated as personal income for tax purposes.

Minimal Compliance Requirements: Compared to other structures, sole traders face fewer ongoing compliance obligations, reducing administrative burdens and costs.

Cons of Sole Trader Structure for Small Businesses:

Unlimited Liability: One significant drawback is that sole traders have unlimited liability, meaning their personal assets may be at risk in case of business debts or legal issues.

Limited Access to Capital: Small business owners may find it difficult to secure substantial capital for expansion or investment, as lenders and investors may prefer entities with more formal structures.

Limited Tax Planning: As a sole trader, business owners are individually responsible for paying tax on their business profit. If the total income exceeds $180,000, the tax could reach as high as 47%, as it is assessed based on the individual’s marginal tax rate.

Credibility and Perception: Depending on the industry, a sole trader structure for small businesses might be perceived as less professional or established, which can affect partnerships, contracts, and customer trust.

Expensive to Change: If the business is performing exceptionally well, most sole traders consult with specialised accountants to consider changing their business structure. Given the various existing tax rules, a specialist accountant in structure, can modify the structure without incurring capital gains tax, provided it meets certain criteria. However, such changes can sometimes be costly, time-consuming, and administratively challenging.

Considering these pros and cons, small business owners should carefully evaluate their goals and circumstances to determine if the sole trader structure aligns with their objectives. Seeking guidance from a specialist business accountant can aid in making an informed decision based on their specific needs.

2. Partnership

Partnerships are formed when two or more individuals work together and share profits, losses, and liabilities. The Australian Government’s business resource website highlights the importance of creating a legally binding partnership agreement to prevent potential disputes among partners.

Pros of Partnership Structure for Small Businesses (Business Structure):

Shared Responsibility: In a partnership, the workload and responsibilities are divided among the partners, allowing for a more balanced workload and shared decision-making.

Diverse Skills and Expertise: Each partner may bring unique skills, experience, and expertise to the business, enhancing its overall capabilities and potential for success.

Access to Capital and Resources: Partners can contribute financial resources, share costs, and leverage each other’s networks, making it easier for small businesses to access funding and other necessary resources.

Shared Risk: Partners share the risks and liabilities of the business, providing support and a shared burden in challenging times.

Flexibility and Adaptability: Partnerships offer a flexible and adaptable structure, allowing for adjustments in partnership agreements and roles to accommodate the evolving needs of the small business.

Cons of Partnership Structure for Small Businesses:

Unlimited Liability: Partnership structures entail unlimited personal liability for business debts, meaning partners’ personal assets can be at risk in case of financial difficulties or legal issues.

Disagreements and Conflict: Differences in opinions, decision-making, or commitment levels among partners can lead to conflicts and disputes that may negatively impact the business’s operations and relationships.

Shared Decision-Making: Partnership requires consensus-based decision-making, which can slow down the decision-making process, especially in situations where partners have conflicting viewpoints.

Potential for Disruption: The departure, retirement, or death of a partner can disrupt the partnership and may require renegotiation of agreements or restructuring of the business.

Sharing of Profits: Partnerships typically involve sharing profits among partners based on the agreed-upon distribution, which may necessitate compromise and may not always align with individual contributions.

It’s crucial for small business owners to carefully weigh the pros and cons of the partnership structure, evaluating how they align with their goals, the capabilities and dynamics of potential partners, and the nature of the business itself. A partnership can be a strategic structure, offering benefits in tax planning and asset protection, provided it is set up correctly. We strongly recommend seeking advice from a skilled business accountant before establishing a partnership structure.

3. Company

Establishing a company is a separate legal entity from its owners, providing limited liability protection. The Australian Securities and Investments Commission (ASIC) website outlines the step-by-step process of registering a company, fulfilling director obligations, and maintaining compliance with regulations.

Pros of Company Structure for Small Businesses:

Limited Liability: One of the significant advantages of a company structure is that the liability of shareholders or owners is limited to their investment in the company. Their personal assets are generally protected from business debts and legal liabilities.

Credibility and Perceived Stability: A registered company often carries a higher level of credibility and perceived stability in the eyes of customers, suppliers, partners, and investors. This enhanced reputation can positively impact business opportunities and growth.

Access to Capital: Companies have more options to raise capital compared to other business structures. They can attract investors, issue shares, and access funding through venture capital, loans, or public offerings, providing potential avenues for business expansion and growth.

Continuity and Succession: The existence of a company is separate from its owners. This allows for easier transfer of ownership through the sale or transfer of shares, ensuring continuity and facilitating succession planning.

Tax Planning Opportunities: Companies offer potential tax planning advantages through various deductions, allowances, and tax concessions available to businesses. Seeking guidance from a specialised business tax professionals can help improve tax strategies within a company structure.

Cons of Company Structure for Small Businesses:

Compliance and Administrative Requirements: Companies face more extensive compliance obligations, including annual financial reporting, maintaining shareholder registers, holding meetings, and adhering to corporate governance practices. These requirements can involve additional costs and administrative burdens for small businesses.

Cost of Formation and Maintenance: Establishing and maintaining a company incurs costs, such as registration fees, legal fees, ongoing ASIC fees, and accounting fees for compliance and reporting. This factor should be considered, particularly for small businesses with limited financial resources.

Complexity and Decision-Making Process: Companies typically require more formal and structured decision-making processes, including board meetings and the involvement of directors. The decision-making process can be more time-consuming and less flexible compared to other business structures.

Shareholder Disputes: Business decisions in a company structure may involve conflicts among shareholders, especially when minority shareholders feel their interests are being marginalized. Properly drafted shareholder agreements and legal advice can help mitigate such disputes.

Capital Gain Discount: According to the guidelines provided by the Australian Taxation Office (ATO), it’s crucial for business owners to be aware that companies do not qualify for the 50% capital gains discount. This means that if a company sells a business asset or real estate, it will not benefit from the 50% discount on capital gains that individuals and certain trusts might be eligible for. This

Liquidation Process: Liquidation is a formal process wherein a company ceases its operations and winds up its affairs. It involves selling off the company’s assets and distributing the proceeds to its creditors. While liquidation may seem like a straightforward solution for businesses facing insurmountable financial challenges, it’s essential to understand that it comes with significant costs.

One of the primary expenses in the liquidation process is the engagement of a liquidator. A liquidator is a professional appointed to oversee the orderly winding up of a company, ensuring that all legal requirements are met and creditors are paid as equitably as possible. Their expertise is crucial, but it comes at a price. Engaging a liquidator can be expensive, adding to the financial strain of an already challenging situation.

4. Trusts

Trusts are commonly used for asset protection and tax purposes. The Australian Taxation Office (ATO) offers comprehensive resources on different types of trusts, including discretionary trusts, unit trusts, and hybrid trusts. Understanding the tax implications and trustee responsibilities is crucial when setting up and managing a trust.

Pros of Trust Structure for Small Businesses:

Asset Protection: A trust structure allows for effective asset protection, as the assets held in the trust are separate from the personal assets of the beneficiaries. This can provide a layer of security in the event of business debts or legal liabilities.

Better Tax Planning: Trusts offer tax planning advantages, allowing for the distribution of income and tax liabilities among beneficiaries. This flexibility can optimise tax efficiency and potentially reduce the overall tax burden on the business and its beneficiaries.

Succession Planning: Trusts facilitate easy transfer of ownership and succession planning, as the trust’s assets can be passed on to new beneficiaries without the need for complex legal procedures. This ensures continuity and ease of transition within the business.

Investment Opportunities: Trusts can be beneficial for small businesses seeking to attract investors, as they allow for the issuance of units or interests in the Unit trust. This provides a structured mechanism for investors to participate in the business while maintaining the governance framework of the trust.

Privacy and Confidentiality: Trust structures offer a level of privacy and confidentiality, as details of the trust and its beneficiaries are generally not publicly disclosed. This can be advantageous for businesses that prefer to keep their ownership structure discreet.

Cons of Trust Structure for Small Businesses:

Complexity and Costs: Establishing and maintaining a trust structure can involve complex legal and accounting requirements. Professional advice and ongoing administrative expenses may be necessary, which can increase the overall costs for small businesses.

Compliance Obligations: Trusts have specific compliance obligations, such as trust tax returns and record-keeping requirements. Failure to meet these obligations can result in penalties or legal consequences, underscoring the importance of proper administration and adherence to trust laws.

Limited Access to Capital: Compared to other structures, trusts may face challenges in accessing external funding or raising capital. Lenders or investors may prefer structures with more clearly defined ownership and control mechanisms.

It is important for small businesses considering a trust structure to seek advice from experienced professionals, such as lawyers and accountants specialising in trust law, to ensure compliance and make informed decisions based on their specific circumstances and objectives.

Plan of Actions for the New Business Owners:

1. Evaluate Your Business Goals and Needs
   • Take the time to carefully consider your business goals, vision, and long-term objectives.
   • Assess the nature of your business, its potential for growth, and its financial requirements.
   • Determine your risk tolerance and how much personal liability you’re willing to assume.
2. Seek Professional Advice
   • Consult with a specialist business accountant or with accountants from firms like Investax Group that specialise in business and investment structure to receive guidance tailored to your specific circumstances.
   • Discuss the tax implications, asset protection, and legal requirements associated with each business structure.
   • Discuss importance of business name registration, trademarks, IP etc.
   • Implementing right employment contract
   • Implementing the right insurance for the business
3. Understand Cost of Managing Each Structure
   • Generally, microbusiness owners such as lawn mowers, gardeners, cleaners, and IT contractors choose to set up a sole trader structure because they do not anticipate growing into small to medium-sized businesses. High-income earners like medical practitioners or barristers must establish a sole trader structure due to legal requirements. Typically, a sole trader structure is less expensive to manage; however, costs can vary depending on how you maintain your records. Annual accounting fees generally start at $500 and can exceed $5,000, depending on the type and size of the business.
   • Management costs for partnership, company, and trust structures in small businesses include accounting fees, ASIC fees, ASIC agency fees, subscription fees for record-keeping software (such as (Xero, Quickbooks, MYOB), and professional bookkeeping fees. Annual accounting fees for these entities can exceed $2,000, while the combined cost of the ASIC agent fee and the annual ASIC fee may go over $650, depending on the number of employees. Software costs typically range from $25 to $170 per month, and for businesses of varying sizes, monthly bookkeeping fees can vary between $500 and $1,000. If you have employees, payroll costs will
     add to these expenses.
   • Legal fees for drafting shareholders’ agreements, partnership agreements, and establishing the business structure can range from $3,000 to $6,000, depending on the specific structure and the types of agreements you require from the legal team. All of the above costs are estimated costs that we have observed over the years, as charged by various accountants and legal professionals. These figures are exclusive of GST and serve as a guide for our readers.
4. Choose the Most Suitable Business Structure
   • Based on your evaluation and professional advice, select the business structure that aligns with your goals and needs.
   • Complete the necessary registration and documentation for the chosen structure, whether it’s a sole trader, partnership, company, or trust.
5. Comply with Legal and the ATO Requirements
   • Ensure compliance with all legal and tax obligations associated with your chosen business structure.
   • Ensure you have the ABN, & TFN for your business structure. If you are operating from a company, ensure you have the A.C.N.
   • If you are applying to become a director of a company, you must have a Director ID
   • Keep accurate records of income, expenses, and financial transactions.
6. Financial Management
   • Implement sound financial management practices to monitor your business’s financial health and profitability.
   • Consider hiring a qualified accountant or bookkeeper to assist with financial record-keeping and reporting.
7. Plan for Business Continuity and Succession
   • Develop a clear succession plan, especially if you choose a structure that allows for easy transfer of ownership, such as a company or trust.
   • Ensure that you lodge your tax returns, Business Activity Statements (BAS), and Instalment Activity Statements (IAS) for your business punctually, so a successor recognises the ease of transferring a well-managed enterprise.
8. Stay Informed
   • Stay up to date with changes in tax laws, regulations, and compliance requirements relevant to your business structure.
   • Continuously seek professional help as needed.
   • Subscribe to the newsletter of reputable accounting firms like Investax and legal practices to stay up to date.

In conclusion, choosing the right business structure in Australia is a critical decision that can significantly impact the success and management costs of your small business. Whether you opt for a sole trader, partnership, company, or trust structure, each comes with its own set of advantages and challenges, from simplicity and control to compliance requirements and liability protection.

It’s essential to carefully evaluate your business goals, seek professional advice, and understand the associated costs, including accounting fees, legal expenses, software subscriptions, and more. Being well-informed and making informed decisions can save you both time and money in the long run.

At Investax Group, we understand the complexities of business structures and the unique needs of small businesses. If you require assistance or guidance in choosing the right structure or managing your business needs, we invite you to contact us. Our team of experts is here to provide you with tailored solutions to help you achieve your business goals and navigate the ever-changing landscape of Australian business regulations and requirements. Your success is our priority, and we look forward to being your trusted partner in business.

References:

1. Counts of Australian Business
2. Australian Taxation Office (ATO) – Official website: www.ato.gov.au
3. Capital Gain Discount – https://www.ato.gov.au/Individuals/Capital-gains-tax/CGT-
   discount/
4. Australian Government’s business resource website: www.business.gov.au
5. Australian Securities and Investments Commission (ASIC): www.asic.gov.au
6. Xero Pricing – https://www.xero.com/au/pricing-plans/
7. QuickBooks Pricing – https://quickbooks.intuit.com/au/pricing/
8. MYOB Pricing-
   https://www.myob.com/au/pricing?&&&&gad=1&gclid=EAIaIQobChMIpsiWxO6hggMV
   ARF7Bx0vzg0HEAAYASACEgJ78_D_BwE&gclsrc=aw.ds
9. Director ID/ABRS – https://www.abrs.gov.au/director-identification-number