Advivo outlines how to determine the best structure for your business.
We are often asked, “what is the best business structure?” The truth is, there is no one size that fits all and the real question should be “what is the best structure for my circumstances, objectives and financial position?”
We choose different structures for different reasons. Asset/risk protection, taxation benefits, and succession are just a few. Satisfying all objectives is often difficult as the best structure for risk protection generally is not necessarily the best for minimising taxation.
When considering the most appropriate structure for the optimum taxation benefit and risk protection, there are a number of questions to be considered:
· Is the asset/business to be a long-term hold or is the asset expected to be sold in the future?
· What is the level of debt, if any, and the impact of negative gearing on future taxable
income?
· What is the exposure to risk, including trading, non-trading, debt levels and staff?
The answer to these questions, along with the impact of the top four types of Australian tax should be considered:
1. IncomeTax
2. Capital Gain Tax — (CGT)
3. Goods and Services Tax (GST)
4. Duty — (State tax)
When we consider the most appropriate structure, we have four basic options to choose from, as well as any combination of them:
1. Individual
2. Company
3. Trust
4. Partnership
Individuals are the simplest, cheapest and easiest for financing purposes; but not necessarily the best for asset protection or tax minimisation.
Companies have the benefit of limited liability and a potentially lower tax rate than individuals but may not be the best for holding capital assets when there are expected gains.
Trusts can be excellent for dealing with gains on capital assets and can provide good asset protection, but their inability to retain income or distribute losses, means often they are best utilised in combination with other structures.
Partnerships are a combination of at least two of the above and the pros/cons of any partnership will depend on which of the entity types are forming that partnership. Importantly, a decision made by a single partner is binding on the entire partnership and all partners are liable for the debts of the partnership.
Combinations: It is likely that the most suitable structure will end up being a combination of the above. Operating assets may be held in a holding company, with the business being carried on from another company, all owned by discretionary trusts. If a premises is being purchased that would likely be in a different structure again.
“Begin with the end in mind”. It’s one of Stephen Covey’s 7 Habits and is the key principle we use when advising on structures. Circumstances and exact requirements will var, so whether you’re looking to invest in real estate or shares, start or buy a business, or even add a new service or product to your mix, it’s always best to seek professional advice first so as to ensure you have the most appropriate structure in place, suitable to best achieve your goals.
The wrong structure will cost far more in the long term, than the right structure will upfront.
If you would like specific advice, tailored to your unique needs and goals, please don’t hesitate to contact us today.
