What business structure is right for you?

I often get people telling me they want to start a business. This is an exciting time for any budding entrepreneur. I know all too well how tempting it is to just jump in and run, but it’s important that you give serious attention to the way you structure your business as well.

There are several different ways to set up your business structure, with a variety of tax and legal issues to consider.

I’ve decided I’m going to cover each structure in its own separate blog, in order to give each one the attention it deserves (and also not to bore you – I know that people don’t find business structures as exciting as I do!).

So let’s look at the ‘Sole Trader’ structure.

Sole Trader

A sole trader is essentially an individual with an Australian Business Number (ABN). There are a number of reasons why you may choose to start up as a sole trader. You may be only branching into the business world on a part-time basis, while you study or work another job. You could simply be looking for the quickest and easiest way to get started, avoiding the ‘red tape’ that comes from establishing a company structure.

Like anything, there are both advantages and disadvantages to taking this path. Here are some of the more significant ones to think about:

Advantages:

·       There are cheaper start-up establishment costs.

·       You have complete control of the business – you don’t have to worry about shareholders or director’s duties.

·       The financial reporting is less complicated, which also means lower accounting fees.

·       You are taxed at an individual tax rate – this means that if your profit from the business is less than $37,000 you will be taxed at a lower rate than the flat company tax rate of 30% on any profit.

·       You don’t have superannuation, workcover or payroll obligations (although I strongly recommend still contributing to your superannuation – it’s a business tax deduction and you don’t want to end up with no money in your super at say, 60 years of age).

·       In limited circumstances, you can offset your business losses against other income (such as employee income) or carry forward any business losses to offset future profits.

Disadvantages:

·       Because YOU are the business, you’re also personally liable for any debts of the business. You need to seriously consider all the risks involved, and factor in the value of your personal assets, such as the family house, and whether you would be prepared to lose those assets if something went wrong.

·       While not paying workcover might save you money, it also means that if you have an accident, you will not be able to access the benefits associated with it. It’s definitely worthwhile to consider taking out a sickness and accident insurance cover.

·       If your business starts going really well, your profits are still taxed at individual tax rates. This means that if you make $180,000 in profit, you’ll get taxed at 45% for any additional profit instead of a flat company tax rate of 30%.

So these are some things to consider before deciding to become a sole trader. Individuals will always have specific needs and it’s important that you always seek professional advice before setting up your business.

In my next blog, I’ll begin to explore the issues to consider when setting up a Pty Ltd company structure.

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