It is important to stop and carefully consider just what type of structure is the most appropriate for your business and your unique circumstances.
Factors to Consider
Some of the most common matters that influence the type of business structure include:
- Taxation consequences (both during the course of the business and upon the sale or winding up of the enterprise)
- Liability and asset protection
- The number of parties involved and ease of adding/removing parties
- Regulatory requirements in some industries.
Common Types of Business Structures
The most common types of structures that are used in businesses include:
1. Sole Traders
- The most simple form of business ownership
- Simple and cheap to establish
- Few legal or regulatory requirements.
- Traditionally has been a common way for a group of individuals to own a business, but now used less often
- Disadvantages: each partner is jointly and severally liable for the liabilities of the partnership; income is taxed in the hands of each partner at their marginal tax rate; the partnership must be dissolved and reconstituted upon the entry/exit of a partner.
- A Company can enter into contracts in its own right, can raise its own finance and is separate from the individuals involved
- Relatively easy for a shareholder to enter/exit the company and sell their interest in the Company
- Allows for flexibility of ownership, with different classes of shareholders with different rights attached
- Allows for flexibility in relation to control, as the board of directors is separate to the membership of the Company.
- Can provide tax planning and asset protection advantages
- Details of the trust and its beneficiaries are not publicly disclosed
- Types of Trusts
- Discretionary Trusts (or Family Trusts):
- allows wide discretion for the distribution of income to beneficiaries
- consider the roles of Appointor and Trustee
- difficult to admit new owners into the business
- Unit Trusts:
- suitable when there is more than one owner
- fixed proportions for distribution of income
- unitholders can be discretionary trusts
- Hybrid Trusts
- can provide a mix of fixed unitholdings and flexibility for distribution of income within those unitholdings.
5. Limited Partnerships
- Designed to limit personal liability by having two categories of partners:
- “general partners” who have management control and unlimited liability; and
- “limited partners” who are passive and whose liability is limited to the amount they have contributed to the partnership.
6. Joint Ventures
- Where two or more parties carry on a specific commercial enterprise together for their mutual gain, but with no intention of an overall, ongoing relationship
- New joint venture participants can be admitted relatively easily.
Changing the Business Structure
Over time, the circumstances around a business might change so significantly that the original way the business ownership was structured is no longer ideal. A restructuring of the business might be needed due to factors such as the age and family circumstances of the owner, the size of the business, risk and plans to introduce additional owners.
Note that any restructuring cannot be for the purpose of obtaining tax relief. Such an outcome might happen incidentally as a result of compelling and demonstrable commercial reasons for any restructure.
Perhaps the most common changes of business structure happen when a business commences as a sole trader or partnership and the owners desire to incorporate and run the business as a Company.
Since 1 July 2016, eligible small businesses can access CGT rollover relief and restructure without triggering an immediate tax liability. The following key criteria are relevant:
- The parties involved must be small business entities (revenue <$2m)
- The restructure must be genuine and part of an ongoing business
- The underlying beneficial ownership must not change (i.e. equal partners in a partnership must acquire equal interests in the new entity)
- The parties must be Australian residents for tax purposes
- The parties must each choose to apply the roll-over.
Where a business satisfies these criteria, certain business assets can be transferred to the new entity without triggering an immediate tax liability. However, only active assets can be transferred in this way, such as CGT assets, depreciating assets, trading stock and revenue assets. Other types of assets, such as loans to shareholders, are not eligible because they are not active assets.
It is important to remember that changing to a new business structure also requires consideration of a number of other indirect issues, including:
- A new ABN
- New business name registration
- Transferring assets, including registered trade marks
- Updated banking details, invoices and marketing material
- Assignment of the lease for the business premises.