Building a Business: Structure for Success

Choosing a structure is one of the first decisions when you start a business, and one of the hardest to undo later. The structure decides who owns the business, who carries its risk, how its profits are taxed and how easily you can bring in a partner or sell. Your accountant advises on the tax; I advise on the legal side, and we work together.

Sole trader

You run the business in your own name, with your own ABN.

1. Advantages: it is the simplest and cheapest structure to start and to close, you keep all the profit and you make every decision.
2. Disadvantages: you are personally liable for all the business’s debts, so your home and savings are exposed; profits are taxed at your personal rates, which rise above the company rate as income grows; and it is hard to bring in a co-owner or sell part of the business.

Partnership

Two or more people carry on a business together with a view to profit.

1. Advantages: it is easy and inexpensive to set up, and the partners combine their money, skills and contacts.
2. Disadvantages: each partner is liable for all the partnership’s debts, including debts another partner incurs in the course of the business; disputes, and partners joining or leaving, can be hard to manage; and without a partnership agreement, the default rules of the Partnership Act 1891 (Qld) apply.

Private company

A company is a separate legal entity, owned by its shareholders and managed by its directors.

1. Advantages: shareholders are generally not liable for the company’s debts; most small companies pay tax at 25% (otherwise 30%), which can be lower than personal rates; and shares make it straightforward to bring in investors, reward key staff or sell.
2. Disadvantages: it costs more to set up and run, with ASIC fees, registers and an annual review; directors have legal duties, and can be personally liable for insolvent trading and for some unpaid tax and superannuation; banks and landlords usually want personal guarantees from the directors, which cuts across the protection; and losses stay in the company rather than flowing through to the owners.

Discretionary (family) trust

A trustee holds the business for a group of beneficiaries and each year decides which of them receive the income, within the terms of the trust deed.

1. Advantages: income can be distributed among family members in a way that suits their tax positions each year; and with a company as trustee, the people behind the business can have much the same practical protection as in a company, although the directors of a trustee company can be personally liable for its debts if it has no right to be repaid from the trust assets (Corporations Act section 197).
2. Disadvantages: the trustee is personally liable for the trust’s debts (with a right to be repaid from the trust assets), which is why a company trustee is usual; losses are trapped in the trust and can’t be distributed; the deed must be followed and kept up to date; and for Queensland land tax, a trust has a lower tax-free threshold than an individual ($350,000 rather than $600,000).

Many established businesses use a combination: a trading company owned by family trusts, or a separate entity holding property. The right answer depends on your plans for the business, your appetite for risk and your tax position, so it is worth settling with your accountant before you start trading.

Already trading, and the structure no longer fits? See Restructuring a Business in Queensland.