A business structure, also called a tax structure or a legal structure, can be a legal owner of assets and/or operate a business or own investments in its own right, legally recognised in a given jurisdiction and separate from a natural person.
This topic will look only at the main considerations when deciding what business structure may be right for you. If you are buying a business structure that is currently operating, then we suggest you seek professional advice from an accountant. This information is for when you are establishing a business structure.
When choosing a business structure, it is important to understand that your needs and considerations will be unique to you and not one size fits all. It is likely that you won’t find the perfect business structure, as there will be competing factors that will involve some form of trade off, but it is important you engage a professional accountant to help you understand your options and make an informed decision.
You should never copy a business structure from a friend or simply replicate a past business structure decision from another venture. Your circumstances and most likely the venture or purpose of the business structure will be different and it’s also likely legislation will be different – so it’s important to have all the information, weigh up the options and make a well-informed decision.
The difficulty in selecting a business structure, is satisfying your circumstances now, but also having an eye on the future and somewhat crystal balling what your circumstances, position and needs may be in the future. As often, changing business structure is cost prohibitive.
If you wanted to change your business structure, there are a few things you may need to consider, including capital gains tax and stamp duty. Further, If you’re operating a business, administrative difficulties arising from such a change in the legal ownership of the business including: Supplier, customer and employee contracts, bank accounts, ABN, stationary, bookkeeping software, bank loans, and the list goes on.
This article is not a complete discussion, as your circumstances are unknown, and it should be viewed as general information only and should not be acted upon without engaging the services of a professional accountant.
Key factors to consider when choosing a business structure:
- This usually means the protection of the personal assets of the owner and the protection of the assets of the business entity. If the business venture is likely to borrow money, make a loss, trade in litigious areas or find itself in a situation where its liabilities outweigh its assets – asset protection should be a key consideration.
- Where possible, insurance in conjunction with asset protection should always be sought as part of a risk mitigation strategy against litigation.
- A business structure can separate personal assets of an owner or controller from business risk and vice versa, separate personal creditors of an owner/controller or related entity from the assets of the business structure.
- You must always be careful and well informed whenever giving a personal guarantee as if you are attacked by creditors, they will be able to pursue your personal assets.
- It’s important to understand that complete asset protection may not be able to be achieved.
If asset protection is important to you, then an incorporated business structure (company or trust with a trustee company) as opposed to an unincorporated business structure (such as a sole trader or partnership) may be something to consider.
An incorporated entity is where the legal entity/owner is not a natural person (such as a company), whereas an unincorporated business structure, the legal entity/owner is a natural person and therefore, separation of personal asset and business risk is not possible and asset protection is diminished.
Ownership and Control
- To what extent can the owners of the structure decide who and how the structure is to be controlled?
- Does the business structure allow for ownership to be transferred?
- Can unrelated parties become owners? Does it allow for parties to become owners in the future?
- Does the ownership structure demand fixed rights to income and capital or are discretionary rights satisfactory?
- Does the business structure allow funding from owners or other parties?
- Does the business structure allow for control and ownership to be separate?
Income Tax Planning
Need to consider:
- Turnover and likely profit – and profit now and potential in the future. A common error is not thinking about the future and making a decision on the now.
- Will income be classified as revenue income or capital income – this may have a bearing on the business structure selection.
- Marginal tax rates within the ownership group and their families.
- Ability to allocate income to other business structures.
- Ability to maintain loses.
- Access to tax concessions. Think, research and development tax concessions (which are only available to a company).
- Can income or losses from related entities be used?
- Passive investment income outside the business structure.
- Anti-avoidance rule for income tax: when considering income tax planning as part of your business structure selection, the Commissioner of Taxation can apply “Part IVA” of the Tax Act, if it can be shown that a scheme has been entered into in order to derive a tax benefit.
- Personal services income legislation also needs to be considered, as any tax benefits from a business structure may be eliminated when personal services income is being derived.
Capital Gains Tax Planning
- If the business venture is going to derive income that is capital in nature, this is naturally an important consideration and entity selection for these purposes becomes important.
- If a sale of the business structure or business assets is likely in the future (such as selling the goodwill and plant & equipment), it is important to consider the business structure options.
- Main considerations are: does the entity allow for the Capital Gains Tax 50% general discount (and would it be used) and does it also allow access to the Small Business Capital Gains Tax Concessions?
- If capital losses will be derived through the business structure, consider how these may be used to offset future capital gains.
Costs associated with the establishment, operation and wind up of the business structure:
- How much does the business structure cost to establish?
- What are the ongoing yearly fees?
- How complex is the business structure to administer?
- How complex will the business structure be to wind up?
- How long is the life of the business structure and is this a concern?
Not something usually considered when establishing a business structure, but vital to do so.
- Can the business structure admit a new owner(s)?
- Can the business structure transfer within the family?
- When selling, consider what it is you will be likely selling and does this influence your business structure selection?
- Also consider who may be a likely buyer? This should be a consideration for business structure selection. Will it be a senior management team, external third party, an equity partner and a slow transition, will it be family, will it be a stock exchange listing? Or is it unsaleable?
- Capital Gain Tax and its minimisation.
A section here for everything else:
- Does the industry you operate within or the professional body you operate under dictate a particular business structure?
- Will your suppliers or customers require a particular business structure in their dealings with you?
- Will bank or other lenders require a particular business structure?
- Will the licenses or registrations you need to hold be valid only with a particular business structure?
- Will the business structure need to allow for employee ownership / share schemes?
- Can the business structure cope with growth of the business operation?
- Can the business structure allow funding from non-equity partners?
- Can the business structure cope with changes to operations?
As discussed, not one business structure will be right for everyone. This is a complex area that takes careful planning and consideration for the present and the future. It may be that a few business structures are required to achieve your desired outcome.
Whatever may be your right business structure, we implore you to seek the professional advice of an accountant.
About the Author
Mark Rogerson- Managing Director, Rogerson Kenny Business Accountants.
Mark became a Director at Rogerson Kenny Business Accountants in 2011 and is currently Managing Director, CPA qualified, and an SMSF Specialist Advisor™. Mark believes the vision of the firm gives him great focus on how to add value when dealing with clients, being: helping clients achieve their financial goals, guided by our advice and active participation in their business ventures.
Article created, October 2019
If you would like to discuss this topic further, please contact Rogerson Kenny Business Accountants on (03) 9802 2533.