The process of starting or restructuring a business entails numerous critical decisions, with one of the most pivotal being the selection of an appropriate business structure. This decision not only influences your tax obligations but also plays a significant role in the protection of your assets. 

To assist you in making informed decisions, we have put together a summary guide with pros and cons of each structure – whether you are an investor or business owner.

Key Considerations for Selecting a Business Structure

When embarking on a new business venture or restructuring an existing entity, it is essential to consider the following key factors to determine the most suitable business structure:

Sole Trader

Description: The business owner operates under their own name or a registered business name, managing and controlling the business while bearing personal responsibility for its debts and liabilities.

  • Tax Implications: Business profit or loss is included in the sole trader’s personal tax return and taxed at individual income tax rates.
  • Pros:
    • Simplest and most cost-effective structure.
    • Personal tax deductions can offset business profits.
  • Cons:
    • No asset protection; personal assets are at risk.
    • May be less tax-effective for high-profit businesses due to higher individual tax rates.
    • Tax losses are carried forward unless non-commercial loss rules are met.

Partnership

Description: This structure involves two or more individuals operating under individual names or a registered business name, sharing profits, risks, and management responsibilities. Partners are jointly liable for business debts.

  • Tax Implications: Each partner reports their share of profit or loss in their personal tax return, taxed at individual income tax rates.
  • Pros:
    • Income splitting between partners.
  • Cons:
    • No asset protection; partners’ personal assets are at risk.
    • May not be tax-effective for high-profit businesses.

Company

Description: A company is a separate legal entity where shareholders own the company, and directors manage the business operations.

  • Tax Implications: Subject to a flat corporate tax rate (generally 30% or 25% for base rate entities).
  • Pros:
    • Achieves asset protection through the limited liability protection for shareholders.
    • Will be more tax-effective for high profit businesses
  • Cons:
    • More complex reporting requirements.
    • More expensive to establish and maintain.

Trust

Description: The business is owned by a person or company acting as trustee of the trust, with profits distributed to beneficiaries. Common types of trusts include Discretionary/Family Trust, Hybrid Trust, and Unit Trust.

  • Tax Implications: Trusts themselves are usually not taxed; instead, beneficiaries are taxed on distributed income.
  • Pros:
    • Income splitting among family members and related entities.
    • Greater asset protection, but ony if the trustee is a company with no assets.
  • Cons:
    • More costly to establish and maintain.

Additional Asset Protection Strategies

In addition to selecting the appropriate business structure, consider these strategies to further safeguard your personal and business assets:

  • Separate Personal and Business Finances: Clearly delineate your business and personal financial affairs.
  • Adequate Business Insurance: Ensure your business is adequately insured against potential risks.
  • Well-Drafted Agreements: Utilise legally sound agreements to protect your interests.

Decision Time

It is crucial to understand that selecting the right business structure is vital for both tax efficiency and asset protection. This knowledge can significantly influence the long-term success and security of your business.

Determining the optimal tax structure for your business can be complex. The team of experts at Hoffman Kelly is here to assist you in making informed decisions to ensure tax minimisation and asset protection.

Contact us today for tailored advice and support.

By Linda Ng