When you start a business, there are a hundred decisions competing for your attention. Your name, your logo, your website, your first clients. Choosing a business structure can feel like a box to tick on the way to the fun part.
But the structure you pick has a real impact on how much tax you pay, how well your personal assets are protected, how much paperwork you need to keep on top of and even how easy it will be to sell or hand over the business one day.
In other words, it pays to think about the exit at the very beginning.
Why your business structure matters
Every structure comes with its own benefits and considerations. There is no single “best” option, only the one that best suits your situation, your goals and the people involved.
Your structure can affect:
- How your business income is taxed
- Whether your personal assets, such as your home, are at risk if something goes wrong
- The cost and complexity of setting up and running the business
- Your reporting and compliance obligations each year
- How easily you can bring in partners, raise money or sell the business later
The four common structures in Australia
Here is a simple overview of the main options most small businesses consider.
- Sole trader. The simplest and cheapest structure to set up. You are the business, you control everything and you report business income on your personal tax return. The trade off is that you are personally responsible for any debts or liabilities.
- Partnership. Two or more people run the business together and share the income and decisions. It is relatively simple to establish, but each partner can be responsible for the debts of the business, so a clear partnership agreement is essential.
- Company. A company is a separate legal entity, which can help protect your personal assets. Companies are more expensive to set up and run, with extra reporting obligations, but they can offer tax and growth advantages as the business becomes more profitable.
- Trust. A trustee holds and manages the business for the benefit of others, known as beneficiaries. Trusts can offer flexibility in how income is distributed, but they are more complex and need careful management.
It is also worth knowing that your structure is not set in stone. Many businesses start as a sole trader and move to a company as they grow, but changing structure later can involve extra cost and paperwork, so it is better to get it as right as possible from the outset.
Questions to ask yourself before you decide
The right structure depends on your circumstances, not on what a friend or competitor has done. Before you sit down with an advisor, take some time to think about:
- Who will be involved? Are you going it alone, or will there be partners, family members or investors?
- What industry are you in? Some industries carry more risk than others, which affects how much protection you may need.
- What personal assets or liabilities do you have? If you own a home or other significant assets, protecting them may be a priority.
- What turnover do you expect? Your expected revenue can influence which structure is the most tax effective.
- What is your personal situation? Whether you are married, have dependants or are living at home can all play a part.
Take your answers to an advisor
Business structures involve tax and legal considerations, so this is one decision where professional advice is well worth it. The good news is that the more prepared you are, the more productive that conversation will be, and the less time you will spend paying for someone to ask you the basics.
Write down your answers to the questions above and bring them along. Your advisor can then weigh up the options with you and recommend the structure that best suits where you are now and where you want to go.
Download your free business structure questionnaire
To help you prepare, we have put together a free questionnaire from our Be The Boss series. It walks you through each of the key questions, with space to fill in your answers so you can take the completed document straight to your advisor.
Download the free business structure questionnaire and book a consultation with our advisory team to discuss your options.
We are here to help you get it right
At Nova Business Services, we believe that understanding your finances puts you in control of your business. Whether you are just starting out or wondering if your current structure still fits, our team can help you understand the numbers behind the decision and look after your bookkeeping, payroll and reporting along the way.
If you would like to chat about your options, give us a call on 1800 668 225 or get in touch through our website.
