BUSINESS

STRUCTURES
MADE EASY

Your 6 Keys to
Understanding
Business Structures
and how to set
yourself up!

Phil Shephard & Ben Walker - Inspire CA

 2014 Inspire CA Pty Ltd

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Inspire CA is an accounting rm with a passion for constantly developing entrepreneurs and
business owners.

CHA PT E R 1

The Basics

One of the most important decisions a business owner needs to make

(after the name of the business of course!) is the choice of business
structure. In fact, getting this choice right is so important that we begin
the analysis of every potential client with their proposed business
One of the most important decisions a
business owner needs to make (after the
name of the business of course!) is the
choice of business structure.

CHOOSING YOUR BUSINESS

STRUCTURE
The choice of how to structure your
business depends on a number of
factors:

In fact, getting this choice right is so

important that we begin the analysis of
every potential client with their proposed
business structure and we then work out
from that point.

1. The type of business you operate;

2. Y o u r p e r s o n a l
circumstances;

nancial

3. How large you intend to grow the

business; and

need to be considered before making a

decision.

4. Whether you are building the

business to operate or to sell.

While it is possible to change

structure as the business grows or
circumstances change, getting
structure right in the rst place
avoid any unnecessary tax
administration costs. We explain
more in Chapter 6.

See the table on the next page for a

comparison of the most common
business structures.
Each structure has advantages,
disadvantages and responsibilities which
A basic comparison of the most
common business structures is
provided below:
Cost to establish and operate
Complexity

the
your
the
can
and
this

Sole trader

Partnership

Company

Trust

Low

Medium

High

High

Simple

Moderate

Complex

Complex

Limited Liability

No

No

Yes

Yes (with a
corporate
Trustee)

Do I receive full profits made from

the business?

Yes

No

No

No

Can I employ staff?

Yes

Yes

Yes

Yes

Do I have to pay myself

superannuation?

No

No

Yes

No

Can I change the legal structure

easily?

Yes

No

No

No

Ability for tax planning e.g. income

splitting?

No

Limited

Limited

Yes

Is it easy to raise capital?

No

No

Yes

Yes

Is it easy to dissolve or exit?

Yes

Yes

No

No

CHA PT E R 2

Sole Traders

Establishing a business as a sole trader is the simplest form of

business structure. It is relatively easy and inexpensive to start and
maintain.

Many sole traders choose to trade

under their own name but this is not a
requirement.

they retain complete control of the

business operation.

A sole trader can register a business

name with the Australian Securities and
Investments Commission (ASIC) and
trade using this name instead.

There is no division between business

assets or personal assets, which
includes any assets jointly owned with
another person (such as your house or
car).

A sole trader is essentially just the

individual in business for themselves

Your liability is unlimited which means

that personal assets can be used to pay

business debts. The individual is also

responsible for remitting the tax on any
business prots made at their marginal
income tax rates.

Relatively easy to change your legal

structure if the business grows, or if you
wish to wind things up.
Disadvantages of Trading as a Sole
Trader

After your rst year of business prots

the Australian Taxation Oce will enter
you into the pay as you go (PAYG)
instalments system.

Unlimited liability which means all

your personal assets are at risk if the
business operation gets in trouble;

The PAYG system requires regular

payments of preliminary tax based on
expected prots for the following year.

Little opportunity for tax planning

you can t split business prots or losses
made with family members and you are
personally liable to pay tax on all the
income derived;

Any excess tax paid as a result of this

will be refunded on lodgement of your
income tax return.

Business debts and losses cannot

be shared;

PROS AND CONS OF RUNNING A

BUSINESS AS A SOLE TRADER

Requirements to pay preliminary tax

on business income which may not have
been earned;

Advantages of Trading as a Sole

Trader

Limited access to additional capital

for business growth;

Easy and inexpensive to establish

and maintain; Complete control of your
assets and business decisions is
retained by individual;

W O R D O F WA R N I N G A G A I N S T
TRADING AS A SOLE TRADER

Fewer reporting requirements;

At Inspire CA, we strongly recommend

business owners avoid operating as a
sole trader.

Any losses incurred as a result of

business activities may be oset against
other income earned (such as
investment income or wages), subject to
satisfying certain conditions;

Even a business which is not generating

sucient income to require a great deal
of tax planning can still expose the
owner s personal assets to signicant
risk.

Yo u a r e n o t c o n s i d e r e d a n
employee of your own business and are
free of any obligation to pay payroll tax,
superannuation contributions or
workers compensation on income your
draw from the business;

CHA PT E R 3

Partnerships

A partnership is a common and relatively inexpensive way to set up a

business. It involves 2 or more co-owners (the partners) participating
together in a business operation.
In order for a partnership to exist the
partners must have the intention of
making and sharing prots, as well as an
understanding that they will each act on
behalf of the other in all business
dealings.

is not necessary for the partnership to

exist.
In the absence of a partnership
agreement The Partnership Act of 1891
sets out the various rules that govern
the conduct of partners.

When establishing a business under a

partnership structure, a formalised
partnership agreement spelling out the
rights, responsibilities and obligations of
each partner is a good idea, although it

The act places joint liability on all

partners for debts and obligations
incurred by the business during their
involvement in the partnership. Partners

are obligated to keep their co-owners

properly informed.

business operation gets into trouble;

Some of the control of business assets
and decisions is relinquished;

While a partnership is a separate

business operation to the partners
involved, having its own Australian
Business Number (ABN) and Tax File
Number (TFN), all the business prots
are taxed in the hands of the partners at
their respective marginal tax rates.

Business debts and losses cannot

be shared with anyone except the
partners;
Requirements to pay preliminary tax
on business income which may not have
been earned;

PROS AND CONS OF

PARTNERSHIPS AS A BUSINESS
STRUCTURE

Limited access to additional capital

for business growth;

W H AT D O W E
PARTNERSHIPS?

Advantages of a Partnership:
Easy and inexpensive to establish
and maintain should the partners exist;

THINK

OF

While a partnership can allow a business

access to additional capital and
knowledge (if the partners are both
individuals rather than companies and
trusts), each partner exposes their
personal assets to an unlimited level of
business risk.

Fewer reporting requirements;

Any losses incurred by the business

may be oset against other income
earned (such as investment income or
wages) subject to satisfying certain
conditions;

We recommend business owners avoid

operating partnerships involving two or
more individuals.

Partners are not considered an

employee of their own business and
are free of any obligation to pay
payroll tax, superannuation
contributions or workers
compensation on income drawn from
the business;
Relatively easy to change your legal
structure if the business grows, or if you
wish to wind things up.
Disadvantages of a Partnership:
Unlimited liability which means all
personal assets are at risk if the

CHA PT E R 4

Companies

Unlike a sole trader who essentially is the business, a company is a

separate legal entity with directors who run the business and
shareholders who own it. When business owners are interested in
restructuring their business operations, the most commonly considered
option is a company.
This is usually because they believe they
understand the way this structure works.
Business owners are generally aware
that a company owns the business
assets and provides protection for their
personal assets against business risk.

However, there is far more to consider

when picking a business structure than
asset protection.
A brief summary of the Benets and
issues of using a company is outlined
below.

PROS AND CONS OF

STRUCTURING YOUR BUSINESS AS
A COMPANY

DIVISION 7A
Business owners who are considering
operating through a company structure
must give due consideration to Division
7A.

Advantages of a Company Structure

Companies can be owned and run
by one person;

Division 7A essentially seeks to prevent

directors and shareholders of private
companies from taking the company s
prots for personal use. Individuals or
entities that take Drawings from a
private company have until the
lodgement date of the company s
income tax return to either repay the
funds in full or enter into a suitable loan
agreement with the company.

Shareholders are not responsible

for company debts unless they sign a
personal guarantee;
Easier to attract capital because of
limited liability;
Companies can operate globally and
own properties;
Companies pay a at 30% tax on
every dollar of prot regardless of home
much money is earned.

Failure to do so will result in the

amounts being treated as an unfranked
dividend which will need to be included
in the shareholder s income tax return
for the year.

Disadvantages of a Company
Structure
Relatively expensive to establish and
register;

As you can imagine if the sum taken

from the company is signicant, this can
result is a substantial tax bill.

Compliance costs are generally

higher and record keeping requirements
are more strict;

CONSIDERING RESTRUCTURING
INTO A COMPANY?
Business owners looking to shift their
business operations from a sole trader
structure into a private company can
experience a number of benets.

Shareholders may have diculties

in recovering their investment because
of limitations on who can buy shares;
Funds taken out of the company as
a salary or wage attract the usual PAYG
withholding and superannuation
obligations;

However, there are also a number of key

dierences and potential issues that
must be understood and carefully
managed.

Companies that hold CGT assets do

not receive the 12 month 50% CGT
discount on disposal.

CHA PT E R 5

Family Trusts

A trust is a structure wherein a Trustee (either an individual or

company) carries on the operations of the Trust on behalf of the
beneficiaries. The actions of the Trustee are governed by the Trust Deed,
which details the rights and obligations of all parties.
Trusts are a common structure choice
for family businesses as it enables the
various family members to become
beneciaries of the Trust that is
operating the business. While the trust is
not a separate legal entity it is a
separate entity for tax purposes.

The trustee must apply for a Tax File

Number (TFN) for the trust and lodge an
annual income tax return.
If a company trustee is used, the trust
oers all the same asset protection
benets as using a company structure,
along with the additional benets of
using a trust. A trust that has individuals
acting as trustees exposes the trustees

10

(the individual, or individuals) to same

levels of business risk as a sole trader.

Broader Tax planning opportunities;

Access to Small Business CGT

concessions;

Broadly speaking there are two common

types of trusts that you will encounter
when making your business structuring
decision: Fixed Trusts and Discretionary
Trusts.

50% 12 month CGT discount;

Asset protection (if a corporate

trustee is used)

DISCRETIONARY TRUSTS

Can pay salaries and wages as well

as superannuation;

A Discretionary Trust is the most exible

form of business structure for a family
trust.

Less regulatory requirements than

trading as a company.

No single beneciary has a xed interest

in the trust s property or the trust s
income.

Disadvantages of a Discretionary
Trust:
Distributions must be in accordance
with the Trust Deed;

The trustee has complete discretion in

the distribution of funds to each
beneciary.

Risk of resettlement if changes are

made to trust members or trust
property without giving consideration to
the rules outlined in the trust deed;

This makes the Discretionary Trust (with

a corporate trustee) a strong and
exible option for a family business. The
family members are protected from
business risk and the trustee has the
discretion to distribute the income in the
most eective way possible.

Losses cannot be distributed;

More of an investment to establish

and maintain when compared to Sole
traders or partnerships;

It is important to remember that all of

the benets oered by a discretionary
trust for a family business make it a
poor choice for businesses where more
than one family or group is involved, as
neither group of beneciaries retains a
xed entitlement to property or income.

Trustees can be personally liable for

some debts of the trust (if individual
trustees are used).

FIXED (UNIT) TRUSTS

Fixed (or sometimes called Unit ) Trusts
are recommended when more than one
family or group is involved in the
business operation. The interest in the
trust is divided into units, similar to
shares in a company.

Advantages of a Discretionary Trust:

Flexibility with income and capital
distribution;

11

The Trustee distributes income to the

beneciaries in accordance with their
respective holdings in the trust.

SO SHOULD YOU USE A FAMILY

TRUST?
Business owners looking to shift their
business operations into a trust
structure can experience a number of
benets.

This is the key point of dierence

between Fixed and Discretionary Trusts:
T h e u n i t s r e m o v e t h e Tr u s t e e s
discretion concerning the distribution of
income.

We strongly recommend anyone

interested in setting up a trust seek
professional advice before doing so.

Advantages of a Fixed (Unit) Trust:

Given the additional requirements of

using a trust, we work closely with all
clients that use this structure to ensure
all their obligations are satised and it is
used in the most ecient manner
possible.

Fixed Interests provide protection

where more than one family or group in
involved in the business;
Asset protection (where a corporate
trustee is used);
Access to Small Business CGT
concessions;
Access to 50% 12 month CGT
discount;
Easy to raise capital by issuing
additional units;
Can pay salaries and wages as well
as superannuation;
Less regulatory requirements than
trading as a company.
Disadvantages of a Fixed (Unit) Trust:
Sale of units can be a CGT event
and attract stamp duty;
Not as exible as a Discretionary
Trust;
Trustees can be personally liable for
some debts of the trust (if an individual
trustee is used).

12

CHA PT E R 6

What If I Get It Wrong?

In order to reinforce the importance of selecting the right business

structure, our final article in this series looks at the consequences of
getting the choice wrong and the potential costs associated with the
transition to a new structure.
Quite often clients start business
operations with little to no thought
about structuring and are confronted
with multiple complications a few years
down the track when changes need to
be made.

trading stock between business entities

is taxable income in the hands of the
entity making the sale. These prots will
be reported on the income tax return of
the relevant entity and tax will be
payable at the applicable tax rate.

INCOME TAX

If you are transferring out of a company

structure, careful consideration must be
given to any advances, loans, or

Any prots made on the transfer of

items such as plant and equipment or

13

intended debt forgiveness by the private

company to shareholders and
shareholders associates. These amounts
could potentially trigger Division 7A and
create unforeseen income tax
consequences for the parties involved.

in a big picture approach to changing

your business structure.
The accounting and legal fees incurred
in establishing your new business
structure and to wind up the old
structure can vary from a one thousand
to tens of thousands depending on the
structural choice and level of advice you
require. This process will involve the
creation of the new structure and all the
associated registrations.

CAPITAL GAINS TAX

Capital Gains Tax (CGT) is a tax charged
on capital gains that arise as the result
of the sale or disposal of certain assets.
While we cannot hope to cover all of the
potential CGT implications of
transferring various business assets
between business structures and the
concessions available to manage the tax
on these gains, it is important to
highlight that Capital Gains Tax must be
considered when changing your
business structure.

Your new structure will generally have its

own Australian Business Number (ABN)
and Tax File Number (TFN). This, in turn,
means that you will need to establish
new bank accounts, update all
agreements with your current sta,
customers, and suppliers as well as
updating the ABN on your existing
marketing material.

STAMP DUTY

During the nancial year in which you

make the transition between business
structures it may be necessary for your
accountant to prepare nancial
statements and income tax returns for
both business entities. This will increase
the cost of your compliance work for
the year.

Depending on the state you live in and

the type of asset in question it may also
be necessary to pay stamp duty on the
transfer of assets between business
entities.
While most states oer concessions,
they do not apply in all cases so you
must ensure you have given due
consideration to the stamp duty
implications on any asset transfers.

A D M I N I S T R AT I O N C O S T S A N D
BUSINESS INTERRUPTION
While not as costly as the other areas of
discussion, there are some smaller
considerations which may be overlooked

14