- Andrew Lind
What is the best legal structure for my small business?
Our Business Lawyers with lawyers in Brisbane & on the Gold Coast can help you answer that question.
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.
Sole Trader
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
Partnership
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
Trust
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
Company
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
More >> Checklist for starting a small business in Australia | Our Business Law services | www.corneyandlind.com.au
{ 60 comments… read them below or add one }
Hi Andrew, could you please provide some advice onthe following situation?.
If three sole traders are working together from the one office (all are designers) yet want to promote themselves as one entity eg xyz studio, and what are the legal implications if things go wrong? Can individuals seek compensation for developing this identity and building value in it? I have registered the xyz name and so I guess there is risk involved if the other two sole traders are using that name on stationery, for promotion etc.
It all seemed simple, but I think it has the potential to be very sticky? If we don’t want to enter into any formal partnership should we just trade as our names or x & associates?
what do you think
thanks jo
Hi Jo
Thanks for your question.
It is possible to have a “group name” and continue to trade as sole traders but the distinction needs to be very carefully maintained and communicated consistently on:
- signage
- business cards
- letterheads etc
By registering a group name, there is a partnership established as a matter of law at least in respect of the ownership of that name. The trick is to make sure there is clear agreement between the partners on matters such as:
- what this partnership can and cannot do
- what happens when a partner leaves
Can individuals seek compensation for developing this identity and building value in it? The short answer is yes.
Additionally, if one partner incorrectly (even inadvertently) held out to a client that it was the partnership who the client was dealing with, the partners would be jointly and separately liable to that client.
Yes it has the potential to become sticky and I recommend that the three of you at least have an initial conference with a lawyer to talk through the issues and the risks. At least then you will be making an informed decision about whether to continue with the group name or not and if you do what you might need a simple partnership agreement to cover.
regards
Andrew Lind
(Note: This is not legal advice but some preliminary information and observations only).
hello Andrew, can you please give me some opinion for this situation?
——————————————————————
You are employed as an accountant in a small accounting firm. One of the major parts of your job is to advise business clients on how hey should structure their businesses in the most TAX EFFECTIVE way.
Neil has come to you to seek advice about purchasing a bakery shop. He has given you the following details:
1. He owns his house worth $500,000 with his wife
2. He has 2 children aged 25 and 15 and would like to include them in the business.
3. He is currently working as an IT consultant and earns $70,000/year and is keen to reduce his
taxable income. He will continue in this after the business commences.
4.He is worried about losing his house if the business fails
Advise Neil as to whether he should establish a partnership, trust or company to purchase the
bakery shop. What are the advantages and disadvantages of each in relation to a person in
Neil’s circumstances?
Hi Irene
Issue one – asset protection
The rule of thumb in asset protection is this – if you control or substantially contribute to the cost of acquisition of an asset you probably own it.
The family home should be kept in the personal names of both or one of the partners to the marriage / relationship. Why? So that the asset remains Capital Gains Tax (CGT) free and concessional stamp duty applies on the purchase.
Gone are the days when you just transfer full ownership in the home to the ‘low risk’ spouse or partner of the ‘at risk’ individual without considered advice on a number of issues including:
- How encumbered is the asset by mortgages?
- What contribution has and will the ‘at risk’ person make to paying off the home?
- Is the ‘at risk’ person solvent (able to pay debts as and when they fall due) and not under a contingent liability (e.g. tax to be paid on returns that have not yet been lodged or possible litigation)
Conducting the business through a structure other than the personal names of the Neil and his wife (if set up and run properly) should allow most liabilities of the business to be quarantined in that new structure.
Issue two – tax planning
Partnership, if genuine rather than contrived, allows partnership profits to be split between the partners. If only one partner really works in the business, that partner should be paid a commercial salary and only profits after that salary are partnership profits.
A company allows profits, after a commercial salary is paid to the family members working in the business to be taxed at the 30% corporate tax rate. However that profit is then trapped in the company. Sure it can reinvested in the business but to get it out of the business dividends must be paid. They can be franked dividends but the difference between the corporate tax rate and the recipient’s tax rate is taxed in the hands of the recipient. There are timing advantages but the tax is still paid.
I consistently find that the best structure for a small family business is a Trustee company (xyz Pty Ltd) as trustee for the xyz Discretionary Trust. I have written about Discretionary Trusts in our Legal Resource Centre.
Not all Discretionary Trust Deeds are created equal
Family or Discretionary Trust Diagram
Increasing Giving via Discretionary Trusts
Issue three – feeding the structures you have birthed
New structures are like new children – often a blessing but they cost money to keep. Extra compliance, tax returns, reporting to ASIC, annual fees to ASIC and advice and succession planning is required.
Issue four – succession planning
Much more than a simple will is required for those who have a discretionary or family trust in making an effective succession plan / estate plan. This is because companies and trusts continue to have life after the death of the Neil and his wife.
Additionally if both children are to be involved in the business and may want to have a join ownership after Neil and his wife have retired, careful thought needs to be given to the structuring of the trust from the outset as trying to tinker with that later will probably have CGT and Stamp Duty implications.
Se also this article in our Legal resource Centre: Sucession Plan – Discretionary Trusts
Happy to help and provide specific advice if desired.
regards
Andrew Lind
(Note: This is not legal advice but some initial observations and information for your assistance.)
Hi Andrew
I have a client who is currently a sole trader in landscaping, he has been offered a weekly salary and 20% of the profits in a Pty Ltd company in exchange for his clients.
To get him set up correctly right from the start, would it be best if he (as an individual) is paid as an employee by the company, and sets up a discretionary trust to become the 20% shareholder to receive any profits, for both asset protection and distribution purposes?
Thank you for your questions.
Issue one – Minority Shareholding
Minority shareholders in small businesses, without a clear Shareholders Agreement are at real risk of being mistreated. A properly considered shareholders agreement will cover matters such as:
- Dividend Policy
- Minimum Dividends (franked or unfranked)
- Restrictions on further diluting the shareholding of existing shareholders
- Rights of sale
Issue two – Income splitting
Only non-personal exertion income can be distributed through a discretionary trust. Therefore I assume that the salary being offered is commercial.
I assume that there other adults or companies who your client wants to share the dividend income with.
Issue three – asset protection
The use of trusts for asset protection has become much more complex since the Richstar decision. There are still real benefits but careful examination of control of the trustee and the terms of the trust need to be considered.
regards
Andrew Lind
Hi, I was wondering, at present my husband has his own business that is run as a Pty Ltd. He is the only one employed. He has been approached to do the same sort of work with a different company but they have said he only needs to be a sole trader. What are the ramifications of changing from Pty Ltd to Sole Trader and is this possible?
Now that you have a company structure in place I would not be winding it up unless you think you will have no use for it down the track.
Changing from a Pty Ltd to a sole trader would probably involve a transfer of goodwill and assets from the company to your husband. Capital Gains Tax and Stamp Duty issues need to be considered.
As a sole trader your husband will be personally liable for the debts and obligations of the business. A Pty Ltd structure provides some protection in this regard.
Regards
Andrew Lind
(Note: These observations are information only and not advice. Please contact us for advice.)
Hi Andrew
I am contracting to several businesses as a sole trader and I am wondering of the CGT and stamp duty implications of transferring my business into a Family Trust Structure a to minimise tax and increase asset protection.
Thanks
Just wondering what are the complications of transferring all my personal assets into a company structure?
many thanks
Hi Andrew,
I’m looking for some advice on how to best set up a structure for a new business I’m establishing.
I’m starting a business of which I will be a Director – say, company X. I will have a shareholding in this business (shareholder agreement is done).
My quesion is around the ownership structure for that shareholding in Company X.
Should I set up another company (company Y), of which I will be the sole director, to own that shareholding in company X?
Also, I have a family trust – can that be the sole shareholder in company Y? Or does it make more sense to use the trust as the shareholder in company X directly?
Your thoughts would be appreciated.
Thanks,
Anthony
In Queensland transferring a business (even to your family trust) attracts duty a full transfer duty rates based on the full unencumbered market value of the business. Your accountant will need to prepare a valuation. The Qld Office of State Revenue web site has calculators.
Capital Gains tax implications are going to depend on how long you have been operating for (in terms of discounts you can claim) and what the cost base of the business is. The ATO web site usually provides some good background information.
Regards
Andrew Lind
(Note: These are initial observations and not legal advice.)
Your question is short but the answer is long and is going to depend on a number of factors such as:
- the type of assets
- your reasons for wanting to do so
- how long you intend to hold the assets for before disposing of them
For example, a principal place of residence should almost always be held in the name of an individual residing in it so as to be able to be exempt from Capital Gains Tax on disposal.
Good questions.
If you intend to distribute all profit every year from the company and not retain earnings and reinvest in the company it is best that the trust trades i.e. change the trustee of the trust to company X and company X trades as trustee of the trust.
If you intend to retain earnings and only distribute some dividends the trust (via its trustee) could be shareholder. This would allow dividend income to be split through the trust and as long as that income was fully distributed each year would be taxed in the hands of the ultimate beneficiaries at their tax rates.
Having company Y as the shareholder seems appealing at first to get the corporate tax rate but then the money is trapped in that company. How do you get it out? Dividends? Well who is then the shareholder of company Y?
Regards
Andrew Lind
(Note: These are initial observations only and not tax or legal advice. I would recommend a 20 minute phone consultation in your case and I should be able to give you some clear answers in that time.)
Hi Andrew,
I recently landed a job in financial services; however the firm will only employ me if I set up a company and contract to them through the company I establish. (I think they do this to save on oncosts.) As part of the setup process, I
am required to give a registered business address (not a PO box). I own my home and that is the only address I can provide…will this impact on the usual CGT exemption when I eventually sell one day? I will be working in the CBD and not from home, but I suspect from time to time there might be some so-called home-office expenses like stationery, internet, phone, etc. that I would like to deduct. I found it hard to get straight answer from the ATO. Also, I do my own personal tax returns so I don’t have an accountant to turn to. I welcome your thoughts.
Kind Regards,
Priscilla.
Simply nominating your home as an address for business correspondence does not change the nature of that asset from being your principal place of residence.
Assuming home office use remains a minor or incidental use of your home, rather than the predominant use, even working from home and claiming some costs as tax deductions will not alter this. However, be careful here …. For example, if you start charging your business rent, or claiming depreciation on the home then the nature of your property at least partially changes and CGT would start to apply. It would be wise for you to take specific advice from an accountant before claiming any of these deductions.
regards
Andrew Lind
(Note: These are initial observations – not advice.)
Hi,
I was wondering if you could tell me if there is a minimum age of a partner in a partnership. Can a partnership be set up with parents and children.
Thanks
Kate
Hi Andrew
My husband and I live in SA. He is working from home as a sole trader, doing web design. Because of health problems, I have been on a disability pension for several years now. I recently decided to start a business as an online share trader, as it is something I enjoy and can do from home, working within my limitations (I hope that at some point in the future it will enable me to get off the disability pension). I have a few questions for you:
1.) What business structure should I/we use? We share an office, and tax claims for use of our home, etc. would be the same. I would help him with tax, etc. as numbers aren’t his thing at all.
2.) Would a particular business structure have more or less effect on my disability pension? It will be awhile before I make much money, and my husband hasn’t made very much money yet. It’s quite a new business (he’s only been in Australia for a year) and the current financial climate doesn’t help.
3.) Would we need or should we have separate ABNs and/or business names?
4.) Would it be better for me to register as a business in this financial year, or wait for the next one? I have already made several trades (mostly losing ones, so far), and I am concerned that if I wait for the next financial year the money that I’ve put into the trades will be regarded by Centrelink as money in the bank, and will therefore affect my pension payments. I don’t know if there are advantages to waiting that would outweigh that issue or not.
Any help you can give me on these issues would be very much appreciated.
Kind regards,
Beth
You asked: What business structure should I/we use?
A great question, but one that needs careful advice taking into account issues such as:
- cost of setup and running it
- simplicity
- risk management and asset protection
- tax planning
- succession planning
Generally, these issues can be adequately explored in a one hour meeting or teleconference. The cost of a lawyer worth their salt in this Business Structuring area is sadly not cheap – however good advice usually pays for itself over and over again. If you would like a fixed fee quote from me for this please let me know.
You asked: Would a particular business structure have more or less effect on my disability pension?
Probably not, as generally income earned from all sources controlled by you needs to be declared. See this Centerlink section.
You asked: Would we need or should we have separate ABNs and/or business names?
One structure and one ABN would be far easier to administer as long as you understand and manage the risks. I can help you with some advice on this.
You asked: Would it be better for me to register as a business in this financial year, or wait for the next one?
As already commented, I think this will make little difference from the perspective of Centrelink. Again, this is an issue to be explored in an initial conference.
Good question. Usually 18 and under 18 in some cases. You will need to take specific advice on this one. Issues about the nature of the business, how this effects third parties dealing with the business and tax consequences for example need to be carefully considered.
Hi Andrew,
Is there a business structure called xxxx Pty ?(note: no LTD)
Thank you!
Hi Andrew
My partner and I are both sole traders operating in different industries. Recently, I have been doing less of my own work and helping him out for various reasons. We are thinking of entering a partnership to save on his tax expenses, and because I want to help him market the business. I could only do that if i was related to the business in some form. I am thinking as an employee, or partner. He does not earn sufficient from the business to form a company and pay the 30% tax rate yet. Hopefully together we can build his business. What is the best structure going forward? and how do we go about setting up a partnership? who do we need to inform? what are the formalities? I read we need a partnership deed, but I am don’t know if we need to submit this to anyone? He already has a trading name and we both have ABN’s.
Hi Andrew,
My husband and I started a partnership 3 years ago but have been going through a series of trial and errors with the business and what we want as our main focus, ie. what will sell best and make us the best turnover. We have finally settled on something that seems to be working, and hope that with a bit more effort we can get it off the ground and thriving. We both work equally within the business from home, however my husband is also working full time while we are establishing ourselves.
We were initially told that a partnership would be the best way to go, however a new accountant mentioned that because of the smaller earnings at present and the fact that my husband will still be working fulltime in other employment for at least the next 2 financial years, that perhaps it would be better to change the business structure from a partnership into a sole trader in my name. Therefore saving the higher tax bracket that my husband is incurring on his business earnings after his normal employment.
I was wondering what your opinion on doing a changeover like this was, if it’s worth it, and also what steps are involved in being able to do a changeover? Will we be out of pocket for anything, or is it simply a case of filling out a few forms?
Any help would be appreciated. Thank you!
Hi Andrew,
I am looking at working for myself in a small psychology practice. My husband is going to provide some fitness training and work on reception in this business also. I have been advised by an accountant that a Trust is the best structure of my business. I have conducted some research into what a trust is, and from everything I have read, it is a complex structure. This is my first business and I just need to know if this advice is good advice.
I am not aware of any such structure in Australia.
Great questions. You are going to need some specific advice on these questions.
Here are some initial observations:
- Once you have one business structure try and stay with it. Each time you change it you may trigger a Capital Gains Tax and Stamp Duty liability.
- While it is best practice to have a Partnership Deed you do not have to have one. Most small business and even some large partnerships don’t. A minute of a meeting is sufficient.
- If a partnership is formed it will need a new ABN unless a partner becomes part of an existing business. There are few other notification requirements.
I could cover all this in a 30 minute conference by phone or face to face. Please let me know if you would like me to send you a quote.
Thanks for the question. Sadly it’s not as simple as filling out a few forms.
A simplified process would include:
1. Transfer Agreement – short form (1-2 pages)
2. Valuation from your accountant of value at the date of the transfer (for CGT & stamp duty purposes)
3. Lodgement of the Transfer Agreement (and valuation) for an assessment of Stamp Duty
4. New ABN (etc) for the new business
If you like I can email you a cost estimate for steps 1 and 3. Just let me know.
A downside is that you would have to repeat the process if you moved the ownership of the business again.
Discretionary Trusts are a good structure for small business. Like any new structure it is like any new “person” in your household. They cost some money to “feed them” but this can be managed.
The trick is to:
- get a good Trust Deed from the outset; and
- have a good lawyer explain how it works for you in language you can understand.
I explain Trusts to people all the time.
Please let me know if you would like me to send you a quote to:
- explain how Trusts work
- prepare a Trust Deed that works for you (and is not going to need expensive advice and repairs later)
- explain how your Trust will work
Andrew – Understand that your reply is information only but was wondering if you could give me a steer. My wife currently operates her business as a Sole trader but has recently gone into an unofficial partnership with a friend who operates as a company. They want to make this “alliance” more formal so that they can correctly account for expenses and claim deductions etc. The friend has suggested that she doesn’t want to have the expense of another company so prefers a partnership but as a sole trader I don’t feel that offers my wife (and our family) enough asset protection – I THINK our house (joint names) etc would be at risk. Can you confirm this and suggest the most appropriate structure for 1) Asset protection and 2) ease of dividing profits and tax benefits of the new structure
Many thanks
Stu W
You are right to be asking these questions. A partnership (even if “unofficial”) means that the partners are jointly and severally liable for the liabilities of the partnership. If your wife is a partner her personal assets (including her interest in a jointly owned property) are at risk.
Has your wife considered taking shares in the company? Shareholders have limited liability and potential for those shares to be owners by another structure (e.g. a family trust). A Shareholders Agreement in this case would desirable.
I suggest that you need to take some advice on this.
Hi Andrew,
I operate a small business as a sole trader and have registered a company. How do I transfer my business into the company? Are there CGT implications or is there an exemption as I am simply transferring the business to a company solely owned by me?
Thanks in advance.
Hi Andrew,
I would like to start a small business as a sole trader but as the business grows several years down the track, I would like to limit my liability as I own two houses which may be at risk.
Can you please tell me if it is possible to change a business from sole trader to pty ltd? Is it an expensive exercise?
Many thanks.
Generally a change of business ownership from a sole trader to a pty ltd company is a deemed transfer of business at market value for capital gains tax and stamp duty purposes. My tip is – get the business in the right structure from the outset.
Transfer can be way of a short form agreement. Depending on the type of assets transfers may need to registered. The consent of your bank may be required.
Yes there are CGT and stamp duty implications. I strongly recommend that you take advice.
Hi Andrew,
What a great site and thank you for offering great feedback.
I am a contracting engineer and earn between 250-350K per annum. I have been employed to single companies ( typically one company per year via employment agencies as a payg). I would like to set up a better/more tax effective structure and was wondering whether the following is a good option.
Also
My wife works parttime, but is mainly looking after our child, and earns about $5-20K per annum.
We own our house – approx $950k . 50/50 tenants in commn.
We own 2 x rentals – value $650k each, debt $500k each, rent $350 p/week – 95% me/ 5% wife for tax reasons.
Should I set up a family trust to supply my engineering/management services, myself as a trustee, with my wife/myself and child as beneficiaries. Thereby reducing my tax liabilities.
Should we change the structure of the rentals for asset protection or tax effectiveness???
Hi Andrew,
Is it possible to change our business from a trust to being a sole trader. I have searched the internet for answers but have had no luck.
Cheers
This will involve a transfer of your business from the trustee of the trust to the individual sole trader. A short form Agreement should be put in place to evidence. Before you do so you should take specific advice on stamp duty and capital gains tax implications.
Please let our Small Business Law team know if we can assist.
These are great questions but ones that need to be answered in a conference when we are providing legal advice that you can rely on. I will email you an initial conference quote.
Hi Andrew,
I’m starting up a new business and wonder if I set it up initially as a Sole Trader, can I ’switch’ into a ‘pty ltd’ in the future if required?
Cheers
Catarina
Dear Andrew,
I am in the process of starting a new sports coaching and sports holiday camps business and was wondering which will be the best way to structure the business (sole trader, company, trust etc). I currently have a full time job and probably will have for the first couple of years of trading.
What are the implications of each type and how would you suggest I structure it?
Thank you in advance
Hi Andrew
My husband has recently set up a company with me being one of the directors but a non shareholder – with this in mind will there be any problems with paying a directors’ dividend to me from the company.
Thanks
Hi Andrew. I am a doctor who works parttime treating patients at a health clinic. I am a sole trader, employed as a contractor who is paid a percentage of the billings on the patients that I see. I have been asked by my employer to setup as a company for the purposes of applying for workers compensation insurance for myself which is not allowable as a sole trader. Is there any advantage for me to trade as a company under these circumstances. What are the risks in terms of asset protection needs in my situation as doctors all have professional indemnity insurance.
Dear Andrew,
we are a group of 3 partners of a newly formed pty ltd involved in an ecommerce business and are clear we need a shareholders agreement. We are also aware of the typical points that need to be covered in such an agreement, but are unclear what the best practices are on such issues. What generally works best, what doesn’t. Can you provide any enlightenment or maybe direct us to somewhere where the pros and cons of certain solutions are discussed?
Many thanks.
Adam
Hi Andrew, if a company is set up in partnership and there are 4 partners, one of which is the Director and each partner is operating through a trust so the trusts form the parternship for the business. Which document outlines the responsibilities of the individuals within the partnership? Would that be the Trust Deed in the absence of a partnership agreement?
Hi Andrew,
I’m partner of a tourism business from NSW and we’re planning on expanding to Eagle Farm in 6 months time..I”m not sure on some of the obligations/reporting requirements I’d have to do for the company, and what financial matters I’d have to report as a business?
Hi Jessica – a Queensland accountant is the best person to take advice from on these matters.
Hi Vanessa
This one is going to require some specific advice. Please let me know if I can help.
Here are some initial thoughts:
- The key governing documents for a company (which I assume is the trading entity) are the Constitution and possibly a Shareholders Agreement.
- The Trust Deeds sound like they only relate to the affairs of each shareholder in the company.
- There may not be a partnership.
Hi Adam – I am not aware of any publication on this. In my experience it is best to keep an initial conference with a lawyer to go though this with you. Please let me know if I can help with this.
Sorry for the delay in getting back to you. I have been off the air for a couple of weeks.
Sole traders can make workers compensation arrangements.
Professionals trading though companies are still generally responsible personally for their professional advice and actions. Asset protection from general trading activities is possible. An initial conference would be required to discuss this. Let me know if I can help.
A director’s fee could be paid. Only shareholders can receive dividends.