Choosing an appropriate business structure is extremely important when investing, optimising taxation and protecting your assets. If the wrong structure is chosen, this may require a costly restructure at a later date. The most common types of structures are sole traders, companies, partnerships and trusts.

There are five key factors that you must consider when choosing a business structure, or deciding to restructure:

 

Your asset protection needs will depend on the risk profile of the business and the owners. Identify who the ‘at risk’ individuals are in your structure. In professional practices, this will usually be the professionals running the business. In other businesses, this will be whoever is taking on the risks. What will happen to their assets if the business cannot pay its debts?

 

You need to consider how other individuals can enter and exit the business. It is important that you choose a structure that suits the number of owners of the business, and can flex and adapt to later changes. Some structures are only appropriate for individuals, such as a sole trader or discretionary trust. Other structures, such as partnerships or companies, will be able to facilitate multiple members.

 

Each structure has distinct tax implications. Income tax and Stamp Duty are high priorities when initially choosing a structure for a business. Capital Gains Tax is a significant consideration in restructuring.

While it is important to choose a structure that optimises taxation implications, you need to ensure that the choice of structure is not purely motivated by tax avoidance. Tax laws prohibit structures which are only devised for tax avoidance purposes. To ensure that your chosen structure is upheld by the courts, it must be able to be justified by other reasons, such as asset protection.