Software development is a definite focus area for increased audits on the R&D Tax Incentive.…
Choosing the Right Corporate Structure
When establishing your business, how you structure it is almost important as making a sale in the first place. We’ll cover more advanced structures.
When establishing your business, how you structure it is almost important as making a sale in the first place.
- There’s implications for founders across a wide variety of areas, with some areas being more important than others depending on where you’re at with business. These include:
- How you draw money out of the business
- How you invoice clients
- Asset protection
- Ability to obtain government grants
- Cost of maintenance
In this tactic we’ll deep dive into the main structures available and see how they score across the various areas.
Almost every founder starts here in the entrepreneurial journey. For many, obtaining an ABN (Australian Business Number) represents the fastest and easiest way to go out and start making sales.
Because you are essentially the business (on paper), conducting business as a sole trader means you are also liable for all profits made by the business for tax purposes.
You can simply use your existing bank account or set up a different one to help make the accounting a little bit easier.
If you don’t want to invoice people as “Joe or Jane Bloggs” you’ll also need to obtain a registered business name.
Asset protection under sole trader structure is next to nil as parties whom wish to sue can potentially obtain your personal assets as well. Government grants are also not compatible with sole traders, perhaps because the government wishes to reward founders whom have invested a bit more into their structure.
This is for when you have business partners with whom to share the profits (or losses) of your business.
Partners are ‘jointly and severally liable’ meaning if your partners go on a rogue spending spree then you would be jointly liable for payments as well.
Formalities include ideally drafting a partnership agreement, obtaining a TFN & ABN, as well as setting up a separate bank account and completing a separate partnership tax return.
You will be able to invoice as a partnership and purchase goods or services in the name of the partnership too.
The major downside is that there is not much asset protection (owing partly to your joint liability with your partners) and most government grants steer clear of these also.
Perhaps the most popular means for founders to commence a serious venture.
Incorporating a company means you are creating a separate business entity in which to do business, be it “A to Z Loans Pty Ltd” or “Awesome Agency Pty Ltd”
Ownership of a company is carried out via way of owing shares, and control of the company’s affairs are taken up by the directors of a company. Details around a company’s corporate structure are maintained via a corporate register.
Compliance is a bit more sophisticated as ASIC has to be updated around changes in a corporate structure.
With the setup of a separate set of accounts also comes a requirement to maintain these for tax purposes, the activity of which would be largely disclosed via a company tax return.
Drawing funds out of the company is also a bit more involved particularly because of a piece of a tax legislation known as Div7a. To extract funds for your own purposes is ideal to draw a wage, or director’s fee or dividend all of which are disclosed to the ATO.
The main positives for founders are that companies are the most conducive environment for raising funds. Almost all government grants favour a company structure and investors are much more attuned to the idea of buying shares in your company.
Investors are generally limited to the value of their investment in terms of liability and can also receive super generous tax concessions on their investment where the ESIC tax concessions apply as well.
Trusts are mainly employed when founders want to increase their prospects for better asset protection and tax planning opportunities. These are generally not implemented as part of the core business structure but rather a good place for founders to house their interests in their holding or trading companies.
Trusts are renowned for their ability to segregate business risk from your personal situation, particularly as assets or investments held by the trust are not said to be held by any particular entity.
Resulting dividends from the profits of these held entities can be directed towards beneficiaries of the trust which often include immediate family members to share the tax burden (and make use of reduced marginal tax rates).
To setup a trust will involve an executed trust deed as well as paying stamp duty at the state level which can be more slightly costly than setting up a company.
Taxation-wise, trusts are seen as a flow-through entity through which the income of the trust is taxed at the beneficiary level and not in the trust. Through making a resolution before 30 June in the financial year, trustees can decide how the income of the trust is distributed for tax purposes allowing for excellent potential in terms of utilising a family’s various marginal tax rates.
So if you’re testing and validating your idea, a sole trader outfit can get you out of trouble if want to absolutely bootstrap to the limit and is rather easy setup and maintain.
If you’re pursuing a serious business venture, then the company is the best way to go – affording you better opportunities across grants, future business partners and investors.
When you’re concerned about asset protection and more tax planning opportunities then an additional trust is better suited for you.
Next Tactic: Choosing the Right Corporate Structure (Level 2)
We’ll cover more advanced structures which employ a combination of various entities and explore how they interplay to provide founders with additional benefits for their business and peace of mind.