• Stella Jansen

Is your company set up in the proper structure?


Are you starting a new business? Are you considering changing your current business structure to accommodate your expansion?


Setting up your business in the proper structure is one of the top three most important tasks for new entrepreneurs. The other two are to create a business plan and to hire an accountant. There are four business structures to choose from, each with its own set of benefits and drawbacks. They are sole proprietorship, partnership, corporation, and trust. We'll go over each one so you can make the best decision possible, but we strongly advise you to consult with your accountant, who can help you with this process.


Partnership

A partnership structure is ideal if you want to have a partner in crime while keeping costs low. A partnership, as the name implies, involves two or more people running a business together and sharing profits. Under this structure, you can start a business with up to 20 people. Your business, like a sole proprietorship, is not a separate entity from the owners. Partnerships are classified into two types: general and limited. In this section, we will concentrate on a general partnership.


Partnership



Set up costs

A business name registration costs $37 for one year or $88 for two years (3 years).

The cost of hiring a good lawyer to draft a partnership agreement. Domantay Legal comes highly recommended.

Establishment of a business bank account – any bank fees.

Licence and registration

Apply for an Australian Business Number (ABN).

Obtain a business name registration from the Australian Securities and Investment Commission (ASIC)

Record keeping

Your financial records, including partnership tax returns, must be a kept for a period of five years.

If you make any changes to your business, you must notify the government agency within 28 days.

​Business income

Profit is distributed in accordance with the partnership agreement following the assessment of the partnership tax return. Each partner is responsible for paying tax on the net partnership income shares that they receive.

Business debt liability

​All partners are personally liable indefinitely. Your assets can be used to pay off any business debts that you or your partners have incurred.

​Insurance

​The type of insurance you need for your business will be determined by its activities, such as whether it sells products or services and whether it employs people.


Because you are not covered by workers' compensation insurance, you should consider personal injury and disability and death insurance.

If you hire others, you must have workers' compensation insurance.

Accessing money

You can withdraw money from partnership earnings in the same way that a sole trader can, e.g. 50/50.

Control of business

​According to the partnership agreement, partners share control and management.

Ongoing costs

Updating your company name costs $37 for a year or $88 for a lifetime (3 years).

Accounting fees on an ongoing basis.

Closing your business

Depending on the agreement, any partner can usually dissolve the partnership. All partners must sign a notice that is published in a Government Gazette and at least one newspaper in the districts where the business operates. Otherwise, the departing partner could be sued for the debts of the remaining partners.

​Employing staff

Make certain that you: – provide workers' compensation insurance – pay employee payroll tax and PAYG – provide superannuation for eligible employees – understand your tax obligations – understand what your employees are entitled to

Pros to a partnership is as follows

  • Low-cost and simple to use

  • Profits and losses are shared with other co-owners; there is the possibility of income splitting; and there is limited external regulation.

  • It is simple to change the legal structure later.

  • A tax-free threshold of $18,200 (for the fiscal year 2020–21)

Cons to a partnership is as follows

  • Debts owed by a business have unlimited liability.

  • All partners are liable 'jointly and severally' for debts incurred by other partners.

  • Disagreement and conflict among partners pose a risk to business operations.

  • All partners must agree to the sale of partnership assets to someone outside the partnership.

  • Personal tax rates are extremely high (up to 47 percent )

Sole trader

If you're riding solo, this is the simplest and most cost-effective business structure to establish. It has few legal and tax regulations, and profits are reported on your individual tax returns. Freelancers earning less than $18k frequently use this business model to take advantage of the tax-free threshold. You can hire others, but you cannot work for yourself. Your tax brackets and obligations are the same as those for individuals, unless you earn $75k or more, in which case you must register for GST and file BAS statements.


Sole trader


​Set up costs

Except for the registration of a business name (if applicable) – $37 (1 year) or $88 (2 years) (3 years).

Establishment of a business bank account – any bank fees.

​Licence and registration

Apply for an Australian Business Number (ABN).

A business name must be registered with the Australian Securities and Investment Commission (ASIC) (if applicable)

​Record keeping

Your financial records, including tax returns, must be kept for a period of five years.

If you make any changes to your business, you must notify the government agency within 28 days.

Business income

​Because the income from the business is also your personal income, you are personally liable for the tax obligations. Money can be taken out of the business at any time.

Business debt liability

​You are personally liable in an unlimited amount. Your assets can be used to pay off the company's debt.

​Insurance

​The type of insurance you require for your business will be determined by its activities, such as whether it sells products or services and whether it employs people.Because you are not covered by workers' compensation insurance, you should consider insurance for personal injuries as well as disability and death. If you hire others, you will need workers' compensation insurance.

​Accessing money

You can take money out of your business account as personal drawings

Control of business

​You have complete control over the company.

​Ongoing costs

Updating your company name costs $37 for one year or $88 for two years (3 years).

Accounting fees in the future.

Closing your business

You must cancel your ABN and business name within 28 days.

Employing staff

Make certain that you: – provide workers' compensation insurance – pay employee payroll tax and PAYG – provide superannuation for eligible employees – understand your tax obligations – understand what your employees are entitled to

Pros to a Sole trader is as follows

  • Because you are solely responsible for the company, you have complete control and independence.

  • Simple and low-cost

  • You keep all of the profits.

  • A tax loss can be carried forward to the next fiscal year and deducted against income for tax purposes.

  • A tax-free threshold of $18,200 (for the fiscal year 2020–21)

  • You are not required to open a separate bank account (but it is recommended that you do)

Cons to a Sole trader is as follows

  • You are liable indefinitely (your personal assets may be at risk)

  • You bear all of the risk and reward.

  • Personal income tax rates are extremely high (up to 47 percent)

Company

The company business structure is one to consider if you want your business to be a separate legal entity from you. While it is more expensive to establish and run, a company is a separate legal entity with numerous advantages. You can be a sole director and member, or you can have many members in the form of shareholders who share ownership of the company with you.

You can have a maximum of 50 non-staff shareholders and be limited by shares as a proprietary company. This means that the value of your shareholders' shares limits their liability. When you make your company public, anyone can buy shares and invest in it.


Company


Set up costs

​Reservation of a company name – starting at $52

ASIC FEE OF $512 FOR COMPANY REGISTRATION (PTY LTD Registration of a business name (if applicable) – $37 for one year or $88 for two years (3 years)

Establishment of a business bank account – any bank fees

If you require assistance in setting up, please contact us for a quote.

Licence and registration

ACN (Australian company number) – a unique 9-digit number assigned by ASIC.

ABN (Australian Business Number) – can be used instead of ACN.

Tax File Number (TFN) – In order to lodge tax returns, a company must have its own TFN.

Goods and services tax (GST) – If a company's annual revenue is $75,000 or more, it must register for GST.

Record keeping

Tax records (stored by the company) must be kept for at least 5 years, and financial records must be kept for at least 7 years. The ASIC conducts an annual review of these.

Financial records – Accurate financial statements – Transactions and financial performance of the company are recorded and explained

Records demonstrating your legal obligations and compliance, such as having a registered officer, a business location, regular company meetings, and a written record of them.

If your company's operations change, you must notify the government agency within 28 days.

​Business income

Because the income belongs to the company, a separate business bank account is required. You can take money from the company as the owner in the form of a wage, director fee, or dividend. Any other method of borrowing money will result in a Div7a loan. There is no tax-free threshold, and the maximum tax rate is 25%.

The company may pay you, the director, a salary or a director's fee. This must be reported on your personal tax return.

Business debt liability

​Although liability is limited, if you are the company's director, you may be personally liable if the company fails to pay its debts.

​Insurance

​The type of insurance you require for your business will be determined by its operations. Directors' liability insurance is something to think about.

​Accessing money

​A separate bank account for the company is required. 'Personal drawings' are not permitted, and directors are compensated with a salary or a directors fee. Dividends and shares can also be used to generate income.

​Control of business

If you are the company's sole director, you have complete control. If there is more than one director, management must follow the company's constitution.

Ongoing costs

​Fees may apply depending on the nature of your business. To keep the company registered, an ASIC annual review fee must be paid.

Updating your company name costs $37 for a year or $88 for a lifetime (3 years).

Accounting fees on an ongoing basis.

Closing your business

You must follow a formal deregistration process.

Employing staff

Make certain that you: – provide workers' compensation insurance – pay employee payroll tax and PAYG – provide superannuation for eligible employees – understand your tax obligations – know what your employees are entitled to – register for State Payroll Tax if your wages exceed the state's threshold

Pros to a Company is as follows

  • Shareholders have limited liability.

  • By selling shares, shareholders' ownership can be easily transferred.

  • The company may employ family members.

  • A company can conduct business anywhere in Australia.

  • Because of the limited liability, capital is more easily attracted.

  • For small businesses with less than $50 million in annual revenue, the tax rate is capped at 25%.

Cons to a Company is as follows

  • Complex business structure that is relatively costly to set up and run

  • There are numerous reporting requirements.

  • Your company's financials are available to the public.

  • Profits earned by shareholders are taxed.

Trust

Another complex business structure in which a trustee (a person or a company) holds and operates the business assets for the benefit of the beneficiaries, who are usually the business owner(s), and distributes annual profits to them.


Trust


Set up costs

Registration of a business name (if applicable) – $37 for one year or $88 for two years (3 years)

The fee for a solicitor/accountant to draft a trust deed

ASIC charges an additional $512 to form a Corporate Trustee (company).

Establishment of a business bank account – any bank fees

If you require assistance with setup, please contact us for a quote.

Licence and registration

​ACN (Australian company number) – a unique 9-digit number assigned by ASIC (if using a company as trustee).

ABN (Australian Business Number) – The trustee must obtain an ABN for the trust.

Tax File Number (TFN) – In order to lodge tax returns, the trust must have its own TFN.

Goods and services tax (GST) – If the trust's annual revenue is $75,000 or more, it must register for GST.

​Record keeping

​Your financial records, including partnership tax returns, must be kept for a period of five years. If you make any changes to your business, you must notify the government agency within 28 days.

Business income

​Profits are the property of the trust and must be distributed to the beneficiaries.

Business debt liability

Limited liability.

​Insurance

​The type of insurance you require for your business will be determined by its operations. Directors' liability insurance is something to think about.

​Accessing money

​Profits are distributed to the beneficiaries, who are under the trustee's control.

Control of business

​The business is strictly governed by the trust deed, which demonstrates the trust's authority and formalizes its administration.

Ongoing costs

​Updating your company name costs $37 for a year or $88 for a lifetime (3 years).

Annual ASIC fees for company registration (currently $276, but subject to annual increase)

Accounting fees on an ongoing basis

Closing your business

​It can be closed with the beneficiaries' agreement.

​Employing staff

​Make certain that you: – provide workers' compensation insurance – pay employee payroll tax and PAYG – provide superannuation for eligible employees – understand your tax obligations – know what your employees are entitled to – register for State Payroll Tax if your wages exceed the state's threshold

Pros to a Trust is as follows

  • Liability is limited. Asset protection in the event of a bankruptcy

  • Tax maximisation: there are no significant tax consequences for beneficiaries accumulating assets or capital.

  • Income distribution among beneficiaries can be flexible.

Cons to a Trust is as follows

  • It is difficult to set up and must strictly adhere to the conditions outlined in the formal trust deed.

  • Due to the complexity, it is relatively expensive to establish and operate, and it is subject to higher compliance costs.

  • Capital losses must be financed with after-tax income.

  • Trusts have an 80-year lifespan.

Each business is unique, and the structure that works best for you will be determined by your financial situation and business plan. While it is critical to get it right from the start, circumstances change, and you can adjust your business structure as needed.

There's a lot to take in there, but we're here to help and walk you through it. We have the knowledge to advise you on the best structure and assist you in setting it up correctly.


Feel free to contact us for any assistance you may require. At Accountant360, we strive to provide high-quality service that constantly meets and sometimes exceeds our customers' expectations.

0 views0 comments