Choosing the best entity structure for your business: Engaging in business carries inherent risks that can potentially endanger both your business and personal wealth. It’s therefore essential for business owners to evaluate ways to protect not only their business assets, but especially their personal ones - operating under the correct structure can do that.
Any business can face threats and risks from both internal and external sources. External risks can come from creditors, clients (for negligence issues) and the general public. Internally, attacks can come from the employees, fraud, other partner’s actions, death and illness among owners.
WITH SO MANY RISKS, HOW CAN I PROTECT MY ASSETS?
The idea is to separate the business asset from personal assets. Reviewing your business structure can help you examine whether your personal assets will be affected by your business transactions. Typically, two entities are setup. One holding and managing your business assets, and another entity managing your personal assets.
By separating business from personal assets, you can reduce the risks of losing all your personal assets if the business doesn’t pan out. In other words, we are making sure that your private or family wealth is protected in case of business failure, business sale or liquidation of any business assets.
There are different types of business structures your business can operate under. The common ones are sole proprietorships, partnerships, companies and trusts.
Here’s a summary of the differences between the four most popular business structures:
|Simple Business Structure, with relatively easy record keeping obligations||Yes||No||No||No|
|Can be owned and run by one person||Yes||Yes||No||Yes|
|High initial set-up fees?||No||Middle||No||Yes|
|Can hire staff?||Yes||Yes||Yes||Yes|
|Tax Benefits?||Only when profits are low. Enjoys tax-free threshold||Must distribute profits||Yes, especially if partners are in the same family||Yes, but does not enjoy tax-free threshold|
|Relatively easy to attract capital?||No||No||No||Yes, because of limited liability|
|Pay your own Super?||Yes||Yes||Yes||Yes|
|Collective or personal responsibility for debts / losses||Personal||Trustee takes legal responsibility||Collective||Personal if personal guarantee undertaken|
|Relatively easy to close down?||Yes||No||No||No|
The type of structure you choose can affect your tax liability, asset protection, ongoing costs and tax effectiveness. Consulting with a professional to understand what is best for you will have long-lasting effect in your life. We can help you weigh-in the risks and benefits of each structure to help you decide the best possible structure to support your business today and in the future. If you have questions, you can call us at (07) 5413 9300 or book a no obligation consultation with one of our advisors on this link.