Choosing the right structure for your business is a difficult task and can be contingent on several tax, legal, and commercial considerations, which can affect the success of the business for its lifespan. For this reason, it’s worthwhile weighing up the pros and cons, mainly to avoid paying excessive tax, but also to uncomplicated any future succession or sale of your business.

Be patient and choose wisely when planning how you would like the business to look and operate, it’s a worthy investment. There are several business structures that may or may not work for you: sole trader, company, partnership and trust.

In spite of the assumption that incorporating attracts various tax benefits and weightier fiscal security to directors, sometimes this doesn’t happen. Actually, it can be more beneficial to run a partnership for certain business models.

The individual firm should look to their goals for growth, and their outreach and resources in deciding the most suitable path. While selecting the most appropriate business structure is an important stage in implementing your business plan, there are some essential features distinguishing limited companies and partnerships that ought to be explored and explained first.

First, a limited company is a legal entity, the operations of which are the responsibility of its directors, and ownership divided amongst its shareholders. Importantly, these can be the same people. Every company is required to report their accounts annually, while smaller businesses need only summarize a short version of their finances.

Partnerships, however, differ insofar as the partners themselves bare the responsibility of each other partner. For this reason, it is very common to have a Partnership Agreement or Partnership Deed of Dissolution in place to regulate the responsibilities of the partners to a firm. In contrast, partnerships aren’t required to publish or audit their books, despite their size, but the current trend is moving to a more transparent state of affairs.

Some businesses will create a limited liability company that runs parallel to the partnership. This approach can be flexible as it enables a business to protect itself. It can also be a convenient way of guaranteeing the perpetual succession of the business, because partners leaving the firm can lead to a company dissolution, whereas a company will continue even following the departure of directors.

Limited partnerships come with the pros of limited liability while remaining a partnership. It comes as no surprise that many businesses are now looking at this option.

Since its members are only liable in a limited sense, in order to protect those dealing with an LLP, businesses operating under this structure must keep all accounting records, and must deliver audited accounts every year to ASIC.

The exceptions and limitations that apply to companies, such as the handing over of summarised accounts and the exemption from being audited also pertain to LLPs.

Is limited liability better?

The type of work that your business conducts often determines the necessity of having limited liability. Normally, if your company is transnational or represents large clientele, from a commercial perspective, incorporation may be desirable.

A limited structure, however, won’t completely shield the owners from resposnsibility. For example, guarantees may be personally required from proprietors seeking funding or renewed loans. In any case, you should consult a business lawyer for advice on the type of insurance you will need.

What do you want out of the business?

In general, if your goal is to leave after a short period, or put more of your own money into the business, being incorporated can be advantageous with respect to leftover profits, since the tax for corporations (30%) is lower than the income tax that partners would have to pay (up to 44.9%).

Similarly, if directors pay themselves a lesser amount and place more money back into the business, a limited liability structure is financially advantageous. Basically, different profit margins will impact on the financial stability of the company, which means all decisions about the company structure should not be made hastily and should be made with a view to current and future goals of the company.

Companies also benefit from a well-organized rewards package, mostly because the roles played by shareholders and directors can overlap in businesses managed by their owner(s). This means profits can be disbursed into bonuses, pensions, salary, dividends and various other means to encourage a more tax efficient package.

Who should be the owner?

Share ownership by owners of a company is seen as a flexible approach. If a shareholder chooses, he or she may transfer part of their ownership to a spouse or child, who may then be paid very well in dividends. Owners can also ‘incentivise’ their senior staff by handing out promotions – a good way of motivating the staff while maintaining ownership.

Conclusion

In summary, there are opportunities to save on tax for both companies and partnerships. Ultimately, choosing the ideal path for your own business will depend on how profitable your business is already, and what your longer-term goals are for growth and investment.

Call LegalVision today on 1300 544 755 for a free fixed-fee quote! One of our business solicitors will happily answer all of your difficult questions and provide you with the best advice on which business structure works for you.

 

Lachlan McKnight

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