One of the most common questions we get here at CloudCounting is which structure is the best way to set up my new business? Of course this is a complex topic, but in summary we would ask you the following questions:
- Do you expect to have a number of clients, or just one client? Is it likely that more than 80% of your revenue will be generated from one client?
- How much profit do you expect to earn?
- Do you have a partner? How much income does your partner earn?
- Do you have children? How old are they?
Following are the most common types of structures recommended by accountants and a list of pros and cons associated with each:
It is widely agreed by most accountants that a Trust structure is the most beneficial for asset protection and income distribution. The most common form of trust established for small business is a Discretionary Trust. Trust are relatively easy and affordable to create. They are usually set up for businesses with one owner.
- Income can be distributed by the trustee on a discretionary basis, making this structure ideal for income distribution to family members.
- Trusts afford a high level of asset protection.
- The accountancy cost to prepare tax returns and financials will be higher than that of a sole trader.
- All trusts must have a trustee, which can be an individual, but is most commonly a corporate trustee, which involves an up front and ongoing cost to set up and administer
- If you are setting up a business with a non family member, trusts are not the best structure as there is no way to enforce income distribution in line with ownership.
- All trust income must be distributed to beneficiaries – it is not possible to retain income in a trust.
Companies are also a popular choice, and often used when ownership of the business is shared between two or more non related parties.
- The corporate tax rate is often lower than an individual’s marginal tax rate (on average) – which provides a good place to leave retained profits for future distribution. Companies can retain profit.
- Company profits, when paid out via dividend, must be paid in proportion to shareholdings.
- Companies also afford a high level of asset protection.
- The accountancy fee to prepare tax returns and financials will be higher than that of a sole trader.
- Companies are more expensive to set up than trusts, and an annual fee must be paid to ASIC to keep the company active.
- It is not possible to easily change distribution of income as this must be paid in accordance with shareholdings.
If you expect to earn less than $87,000 per annum, and asset protection is not a high priority, chances are you should start out your business life as a sole trader. The accountancy cost is much lower and you will still enjoy low marginal tax rates on your income.
Another reason you may wish to start trading as a sole trader is if you expect to derive the majority of your income, i.e more than 80%, from one customer. In many circumstances the benefits a company or a trust may offer will be denied if your business fails this income test.
We have touched on only three potential structures for your new business in this blog, and of course there are many others that could be considered.
If you wish to get in touch to discuss what structure is best for your new business, please do contact us on 04 26 625 683.
The team from CloudCounting