What is the best legal structure for my small business?
The answer is going to depend on your circumstances and factors like – the type of business, the size of the business and your plans for the future.
Here is some information to get you started.
Definition: As a sole trader you are the sole business owner and trade in your own name. (e.g. Fred Smith Plumber).
- Name – You can usually trade in your own name without having to register a business name
- Simple – your customers / clients know precisely who they are dealing with
- Staff – sole traders can have staff. You do not need to all the work
- Tax – you pay tax at your personal marginal tax rates
- GST – the GST rules still apply
- Risk – your personal assets are at risk from liabilities you may incur in the business
Definition: A partnership is two or more persons carrying on a business together with a view to a profit.
- Name – You will usually have to register a business name
- Partnership Deed – You and your partner(s) need to be clear about your obligations and rights
- Tax – the partners pay tax at their respective tax rates
- Risk – partners are generally personally liable for the liabilities that arise in the business
- Rest – a partner can make it possible to take a break
Definition: A trust is a relationship where the trustee carries on a business for the benefit of certain benificaries.
- Trustee – A trust can only conduct business via a trustee. A trustee can be a natural person(s) or a company
- Type – there are different types of trusts – discretionary (family) trusts, unit trusts and hybrid trusts
- Tax – Income splitting – the trustee can split income to beneficiaries with tax paid at their respective tax rates
- Asset protection – trust assets and personally owned assets can often be kept separate. Careful consideration in drafting of the trust is needed here.
- Penal tax – penal tax is levied on retained earnings
Definition: A company is a legal person (apart from its directors and shareholders) providing limited (“Ltd”) liability protection.
- Single director and shareholder is all that is needed
- Tax – a flat 30c in the dollar tax rate applies
- Asset protection – company liabilities generally remain in the company
- Retained earnings – can be accumulated (and only taxed at the 30c in the dollar flat tax rate)
- Dividend franking – dividends can be franked or unfranked