Is my Cairns Business in the Right Structure
cairns tax accountant business structure

Written by Anthony Adcock

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Is my business in the right structure? What are my options?

These are some of the questions I get asked a lot as a business advisor and a Cairns tax accountant. In deciding whether it’s best to operate as a sole trader, partnership, trust or company or a combination of these you need to consider the legal and regulatory environment your business operates in, the taxation implications, how much control you will have, your personal liability, asset protection and the ongoing costs and administration.

There are many other considerations and sometimes it is not about finding the perfect structure but finding the one that best suits your business and legal requirements and it can in some circumstances require a compromise to be made.

It is an important decision to make as once a structure has been chosen and put in place it can be difficult and costly to change or unwind. It is therefore strongly recommended you seek advice from your accountant.

I also believe it is important you personally understand the type of structure you have as well as the legal and regulatory obligations that apply. This will ensure when contracting with this entity the right decisions are made and all the legal and compliance requirements are met.

Following are what I believe to be the main advantages and disadvantages of each of the four main types of structures. I have included some typical examples of the types of businesses and circumstances best suited for each structure as well which should provide some context.

1. Sole Trader – business is owned and operated by you personally
Advantages
You have direct control over business and assets
You are entitled to 100% of the profits
Easy to set up and minimal set up and running costs
Relatively easy to change legal structures at a later date
Disadvantages
You can bear full responsibility for liabilities
Your personal assets could be exposed to pay business debts
You will pay tax at your marginal rates on the income of the business
Cannot split income with other family members
Examples
Home based business
Self-employed tradesman
Suitable for businesses with limited turnover and very little personal liability
Start-up business
2. Partnership – two or more individuals carrying on business together
Advantages
Relatively easy and inexpensive to set up with minimal reporting requirements
Combines the resources and expertise of other people
It is relatively easy to change the legal structure at a later time, i.e. to a company
Disadvantages
All partners are personally responsible for the business debts and each partner is personally liable for debts incurred by other partners
Individual partners are taxed at their marginal rates on their share of the profit
There may be personal differences between the partners
Examples
Husband and wife operated business
Similar businesses joining forces and sharing expertise and resources
Two individuals starting out in business together
3. Company – a separate legal entity which owns and operates the business
Advantages
Limited liability of shareholders
Profits are taxed at the company tax rate which can be lower than individual rates. Easy to set up and minimal set up and running costs
Imputation system ensures company tax that has been paid passes to shareholders as a tax credit when dividends are paid
A company has perpetual succession, i.e. it will continue even after the death of key people in the business
Disadvantages
Expensive to establish and maintain
Reporting and legal requirements can be complex
Directors can be personally responsible if they fail to meet their legal obligations
Money earnt belongs to the company
Examples
Family businesses that want to share profits amongst family members
Businesses with greater exposure to liability
Businesses with high turnover and profits
Where there is a need to separate control and ownership, i.e. for asset protection
4. Trust – is a relationship whereby a trustee carries on business for the benefit of the beneficiaries
Advantages
Discretionary trusts allow for a discretionary allocation of income and capital which can be very tax effective
Provides asset protection in separating the ownership and control of assets
Limited liability is possible if the trustee is a company
Tax free capital gains retain their status when distributed to an individual
Disadvantages
More costly to establish and are a complex legal structure requiring the preparation of a trust deed
Trusts have recently been experiencing a lot more scrutiny from the ATO and this is likely to continue
The power of the trustee is strictly governed and can be limited by the trust deed
Losses cannot be allocated to beneficiaries but are trapped in the trust to be used against future profits
Examples
Family businesses who wish to share profits amongst family members
Businesses with high turnover and profits
Trusts are often used to hold investments such as property due to their asset protection advantages
Often used to hold assets for estate planning and management purposes

Note the above is not an exhaustive list of the advantages and disadvantages of the different structures available but has been designed to provide you with a broad understanding of the differences between each type. Only after having an in-depth discussion with your business and/or legal advisor will you be best placed to make the right decision on the best structure for your business and/or investment.

About the Author

Anthony Adcock is a Fellow of CPA Australia and an experienced Cairns tax accountant who has worked with small businesses for over 25 years in assisting them manage their audit risk, guiding them successfully through difficult audits and helping them meet all their compliance obligations with the ATO.

This advice is general in nature and has been prepared without taking into account your particular financial circumstances, needs and objectives. Before making any decision, you should assess your own circumstances and seek professional advice from your financial and/or taxation advisor.

“Liability limited by a scheme approved under Professional Standards Legislation.”

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