The millennial accountants

WHAT IS THE BEST BUSINESS STRUCTURE FOR ME AND MY BUSINESS PARTNER?

What is the Best Business Structure

Choosing the right business structure is crucial for the success and stability of your venture. The structure you select can affect everything from tax obligations to personal liability and administrative costs. In this article, we’ll explore three common business structures—partnerships, family trusts, and companies—detailing their tax perspectives, asset protection features, and cost implications to help you make an informed decision.

Partnership

A partnership is a business arrangement where two or more individuals share ownership. This structure is straightforward and often used by small businesses and professional groups.

Tax Perspective of Partnerships

In a partnership, the business itself is not taxed as a separate entity. Instead, profits and losses are distributed among the partners, who then report these amounts on their individual tax returns. This can be advantageous as it allows income to be taxed at personal income tax rates, which may be lower than corporate tax rates.

However, the lack of tax flexibility can be a downside. Unlike companies, partnerships cannot retain profits to defer tax liability; all profits are distributed and taxed in the year they are earned.

Asset Protection of Partnerships

One significant drawback of a partnership is the joint and several liabilities. This means that each partner is personally liable for the business’s debts and obligations. If the partnership faces financial difficulties or legal issues, the personal assets of the partners may be at risk.

This structure exposes partners to higher personal financial risk compared to other structures, making it less attractive if significant liabilities are anticipated.

Costs Perspective of Partnerships

Partnerships are generally inexpensive to establish and maintain. The setup costs typically involve legal fees for drafting the partnership agreement. Ongoing costs are minimal but may include accounting and legal fees for annual tax filings and compliance.

Despite the low costs, the potential personal financial risks associated with partnerships should be carefully considered.

Family Trust

A family trust is a structure where a trustee holds assets on behalf of beneficiaries. This arrangement can provide significant tax advantages and asset protection benefits.

Tax Perspective of Family Trusts

Income generated by the trust is distributed to beneficiaries, who then pay tax at their personal income tax rates. This can be highly advantageous if the beneficiaries are in lower tax brackets. Trusts offer flexibility in income distribution, allowing income to be allocated in a tax-efficient manner.

However, the complexity of tax compliance for trusts is higher, and it requires careful planning to maximise tax benefits.

Asset Protection of Family Trusts

Assets held in a family trust are generally protected from the creditors of the beneficiaries. This means that if a beneficiary faces financial difficulties, the assets within the trust are usually safeguarded from claims by creditors.

The trustee has a fiduciary duty to act in the best interests of the beneficiaries, providing an additional layer of oversight and protection.

Costs Perspective of Family Trusts

The costs of establishing and maintaining a family trust are higher than those of a partnership. Initial setup involves legal fees for creating the trust deed, and ongoing costs include annual accounting, auditing, and legal fees for compliance and administration.

Despite the higher costs, the tax advantages and asset protection features of a family trust can make it a worthwhile investment for high-income earners and those with substantial assets.

Company

A company is a separate legal entity, distinct from its owners (shareholders). This structure offers significant benefits in terms of asset protection and tax management.

Tax Perspective of Companies

Companies are taxed at a flat rate, currently 25% for base rate entities. Shareholders can receive dividends, which are then subject to personal income tax, but franking credits can help reduce the overall tax burden.

While the flat tax rate can be beneficial, companies have less flexibility in distributing profits compared to partnerships and trusts. All income is taxed at the corporate rate, and the distribution of profits to shareholders is subject to additional taxation.

Asset Protection of Companies

One of the main advantages of a company is the limited liability protection it offers. Shareholders’ liability is generally limited to the amount they have invested in the company. This means personal assets are usually protected from business debts and liabilities.

Directors of the company may have some personal liability, particularly in cases of misconduct or breaches of duty, but overall, the structure provides robust protection for personal assets.

Costs Perspective of Companies

Establishing a company involves higher costs compared to partnerships and family trusts. These include registration fees, legal costs, and the expenses associated with drafting corporate governance documents. Ongoing costs are also higher due to regular compliance requirements, including annual ASIC fees, accounting, and audit fees.

Despite the higher costs, the asset protection and potential tax benefits of a company structure make it a strong choice for businesses with substantial operations and liabilities.

Summary

Choosing the best structure for your business depends on your specific needs and goals. Here’s a quick summary to help you decide:

  • Partnership: Offers low setup and ongoing costs but exposes partners to personal liability. Best for small businesses with low financial risk.
  • Family Trust: Provides tax benefits and asset protection, with moderate setup and ongoing costs. Suitable for high-income earners and those needing asset protection.
  • Company: Offers strong asset protection and flat tax rates but comes with higher setup and ongoing compliance costs. Ideal for businesses with significant operations and potential liabilities.
 

Before making a decision, it’s essential to consult with a professional. AWF Consulting can help you identify the most suitable structure for your business, ensuring that you make an informed and strategic choice. Contact us today to get expert advice tailored to your unique situation.

Facebook
LinkedIn