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- Legal Responsibility: As a Sole Trader, you’re personally responsible for all aspects of your business, including any debts and liabilities. This means that if your business faces financial challenges, your personal assets could be at risk.
- Business Decisions: You maintain complete control over daily business operations and decisions. This can be advantageous if you prefer a hands-on approach and enjoy making all the decisions.
- Taxation: Your business profits are taxed as personal income at marginal tax rates, which requires careful budgeting to set aside funds for end-of-year tax payments.
- Superannuation: You’re responsible for managing your own superannuation contributions to ensure a comfortable retirement. You can hire employees provided you comply with the obligations of being an employer -note you will not be able to become an ‘employee’ yourself of the entity.
- Setup and Management: Setting up as a Sole Trader is generally straightforward and cost-effective. It involves registering your business name, obtaining an ABN, and registering for GST (if required).
- Bank Accounts: It’s essential to keep your business and personal finances separate. We recommend opening a dedicated business bank account to manage transactions. Additionally, setting up a second savings account for tax savings can help you set aside funds for end-of-year tax obligations.
- Accounting Software: To streamline financial management, setting up accounting software is highly beneficial. We invite you to book a free initial phone consultation with our team at Balanced Beans to discuss how we can assist with Xero software setup and training.
Choose the Right Business Structure for Your Needs: Sole Trader vs. Company vs. Trust
Starting a new business is an exciting journey, and one of the first decisions you'll need to make is choosing the right business structure.
Balanced Beans are here to help you navigate this crucial decision by comparing the three main options: operating as a Sole Trader, establishing a Company or establishing a Trust.
There’s a lot to consider when choosing the appropriate business structure: asset protection and ownership, start-up and ongoing administrative costs and tax implications. It is also important to know how your structure will support your business and daily operations. In this post we take a look at three common business structures to give you an idea of which might be more suitable for your business and personal situation.
Sole Trader: Simplicity and Control
Company: Structure and Protection
- Legal Responsibility: A Company is a separate legal entity, meaning it is responsible for its own debts and liabilities. This structure generally offers protection for your personal assets, although personal guarantees or misconduct can still pose risks.
- Business Decisions: Decision-making in a Company is typically shared among directors and shareholders. This collaborative approach can benefit complex businesses with multiple stakeholders.
- Taxation: Companies are taxed separately at the corporate tax rate. You’ll need to handle payroll, remit PAYG withholding, and pay superannuation contributions for employees, including yourself if you’re on the payroll.
- Superannuation: The Company is required to make superannuation guarantee contributions to your employees super fund on a quarterly basis (you can be an employee of the company), ensuring systematic management of retirement savings.
- Setup and Compliance: Establishing a Company involves more complexity and regulatory requirements. This includes setting up your company structure, preparing necessary forms, and ensuring compliance with ASIC and tax regulations.
- Bank Accounts: It’s crucial for a Company to maintain a dedicated business bank account. Additionally, we recommend having two extra bank accounts: one for holding employee superannuation contributions and one for managing GST, PAYG withholding, and tax savings. This approach ensures that funds are readily available for BAS and tax payments, reducing the risk of cash flow issues.
- Accounting Software: Efficient financial management requires robust accounting software. We offer assistance with Xero software setup, including training and support. Book a free initial phone consultation with Balanced Beans to explore how we can help streamline your accounting processes.
Trust: Asset Protection, Flexibility and Tax Efficiency
- Legal Responsibility: A trust can be used to operate a business, with a trustee managing it on behalf of the beneficiaries. This structure offers asset protection and limits liability, as profits must be distributed to beneficiaries annually. Trust assets are protected from a beneficiary’s bankruptcy since they do not own them.
- Business Decisions: The trustee, either an individual or a corporate entity, legally owns the trust assets and is responsible for contracts and decisions, ensuring assets benefit the beneficiaries. A corporate trustee is often preferred to limit liability. Trusts are particularly suitable for family businesses, allowing family members to be beneficiaries without day-to-day involvement.
- Taxation: Trust income can be distributed to various beneficiaries, potentially minimising tax liability. If all income is distributed to adult beneficiaries, the trust itself won’t owe tax, as beneficiaries report it on their tax returns. However, tax implications arise when distributing to children, and beneficiaries may need to make PAYG instalments. If profits aren’t distributed, the trustee faces tax on undistributed income at the highest rate.
- Superannuation: Trusts are required to make superannuation contributions for any employees (including the trustees) on a quarterly basis and report under STP.
- Setup and Compliance: Establishing a trust requires obtaining a tax file number (TFN) and an ABN, as well as filing an annual trust return. It must also register for GST if turnover exceeds $75,000 and may be required to lodge business activity statements. Setting up and operating a trust can be more complex and costly than other structures.
- Bank Accounts: Once established, a trust must have a separate bank account in the name of the trustee for the trust. The bank typically requires the trust’s ABN to open the account.
- Accounting Software: Using accounting software is highly beneficial for managing the trust’s financials and paying beneficiaries. For assistance with Xero software setup and training, we recommend you consult the expert team at Balanced Beans.
Helping You Decide on Your Business Structure
Choosing the right business structure is a critical first step for a small business owner. Your choice affects how your business functions, including legal and operational risks, asset protection, tax responsibilities, employment matters, and dealings with suppliers and customers.
You’re not forever tied to the business structure you initially choose, however making the right decision based on your current situation and goals can save you time, money and hassle down the track.
It’s worth remembering there are other types of business structures not covered in this post such as a partnerships, co-operatives, social enterprises, incorporated associations and incorporated Aboriginal corporations. Learn more about them here.
As Hunter Valley Bookkeepers and Accountants who service right around Australia, Balanced Beans can simplify the decision-making process and provide insights to help you choose your ideal business structure with confidence.
Reach out to us online or contact us on (02) 4046 1000 to book an appointment.
Gain the assistance of our experienced team when choosing the right business structure.
Talk with us today to gain clarity and create a positive future for your business.