Business Structure Introduction
Business is not everyone’s cup of tea. It demands for a lot of hard work and efforts. Business structure is one thing which cannot be taken for granted as a wrong business structure could make you pay harder at tax time. Basically the tax you pay depends on your business structure only. From your personal liabilities, the amount of paper work your business has to do, the risk to your assets and liabilities to your ability to raise money is all dependent on your business structure.
Starting as sole trader is one of the common practice of all business owners, the reason being that it’s the most simplest and easy to afford structure. It’s a great strategy for initial startup and micro business. Eventually your business grows, changing to another structure. The quite complex task here is to choose between different structures and adopting the best suitable for your business. However, as this instance highlights, the two reasons that you need to get right are the following.
First Consideration: Risk
The very first thing to be taken into account is risk. Every business involves a substantial amount of risk, some being capable of being insured against, however, every risk cannot probably be covered by insurance. Here’s one glaring example for clarification of our point:
Real World Scenario
Adam is engaged in a photography business, which to everyone is a low risk business. He mistakenly left the brakes off while capturing a $300,000 Ferrari. The owner sued Adam, despite the fact that clicks of car rolling down went viral. As a consequence, Adam’s business had to pay a $300,000 in damages.
Structures effect on outocme? Sole Proprietor vs. Company
Sole Trader Business
To meet such a big claim, Bob has to part with all his expensive equipments and sell his house. With no other means left, his family is compelled to move to a rented accommodation and Bob can no longer run his business.
In unpaid share capital, Bob is compelled to pay $100 to his company. To pay off his business debts, the company’s bank accounts containing $1,000 are closed. Since the company has no other assets, it is liquidated and the matter eventually comes to its culmination.
The above illustration is a work of fiction and simplified to clarification that how a right business structure can save your quality time and efforts.
Second Consideration: Tax
To show different tax outcomes for three common business structure of $80,000, the following is a simplified example.
Discretionary Family Trusts: is it worth of?
Discretionary Family Trust, if used with proper care, could protect your assets, provide with succession planning and save your thousands in tax.
Being an entity, a family trust can trade in its own right. At the time of distribution of profit each year, it doesn’t pay any tax itself. Instead the nominal trust beneficiaries are taxed according to their own nominal tax rates. As a trustee for asset protection, every discretionary trust uses a company. However, it is crucial that the trustee should be the one who could be trusted to control the income of the trust as the profit can be distributed to the family members at the sweet will of the trustee. The benefits are difficult to illustrate as it depends on your individual capacity but the below example shows the comparison between a business as a sole trader and a company as a trust.
Real World Scenario
A online store is owned by James. Profits of the business, exclusive of his salary amounted to $200,000. Sally, James’s wife helps him with bookkeeping every week. The couple has two daughters aged 13 and 18. James’s parents are on a Centre link pension while Sally’s parents are self funded retirees with a taxable income of $10,000 each.
What are the next steps?
It is complex to understand about the right business structure. Our Real World Accountants are available at your help to guide you before setting up a business. Book an appointment with our experts to review the pros and cons of all business entity options if you are thinking of changing your business structure for asset protection. The professionals will apply their knowledge to get you the best results.
For more information, contact our Expert Tax Accountants.