How to choose the right business structure?

September 15, 2023

When embarking on the journey of establishing a new business, expanding an existing one, or making investment decisions, the choice of a suitable legal structure is a pivotal consideration. This decision-making process is complex and multifaceted, as there is no one-size-fits-all formula to determine the ideal structure for a specific taxpayer. Each individual or entity venturing into these endeavors will possess a unique set of facts and circumstances that necessitate careful evaluation.

To make an informed decision, taxpayers must assess their particular needs, objectives, and long-term aspirations, both for themselves and their business. Balancing these aspirations and objectives can be challenging, as many desired outcomes may conflict with each other. For instance, one structure might offer advantageous Capital Gains Tax (CGT) implications but be less effective at minimizing income tax, while another could prioritize asset protection but lack other benefits.

Australia recognizes several primary forms of business structures, categorized into four main groups:

  1. Sole Trader: An individual conducting business in their own name.
  2. Partnership: An association of individuals or entities engaged in a joint business venture, not as a formal company.
  3. Company: A distinct legal entity separate from its shareholders.
  4. Trust: A relationship where a trustee manages trust property or income for the benefit of beneficiaries.

Additional business structures in Australia include associations, typically nonprofit organizations, and cooperatives, which involve shared ownership of assets like apartment buildings.

It’s essential to note that investments can be undertaken within any of these mentioned entities, adding another layer of complexity to the decision-making process.

Before finalizing a business structure, various factors should be meticulously considered:

  1. Nature of Business: Evaluate whether the business will hold appreciating or depreciating assets, generate immediate net income, or incur tax losses that can offset other income.
  2. Expected Taxable Income: Consider the expected level of taxable income and the desire to accumulate or withdraw profits.
  3. Asset Value: Assess the value of business assets, especially in relation to access to small business CGT concessions.
  4. Type of Assets: Consider the nature of business assets, including intellectual property and assets subject to specific tax provisions.
  5. Ownership and Obligations: Examine the ownership structure and shared rights and responsibilities among business owners.
  6. Asset Protection: Evaluate the risk of exposing assets to creditor claims and personal liability for business owners.
  7. Tax Minimization: Deliberate tax minimization strategies during business operation and potential tax implications upon disposal.
  8. Capital Raising: Explore options for raising capital, such as employee participation, public investment, joint ventures, new partners, or franchising.
  9. Costs: Account for establishment fees and ongoing maintenance costs associated with the chosen structure.

In conclusion, selecting the appropriate legal structure for a business or investment venture in Australia is a multifaceted decision that hinges on a careful analysis of various factors. Each individual’s or entity’s unique circumstances and objectives will ultimately guide this critical choice.