Why choosing the right Business Structure is critical
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Introduction to Business Structure
Running a business is tough. No one wants to do all that hard work just to find themselves in the wrong business structure at tax time or when something goes wrong. The structure of your business has an impact on how much tax you pay. It also impacts on the amount of paperwork your business has to do, your personal liability, the risk to your assets and your ability to raise money.
Many business owners start as a Sole Trader, often because it’s the cheapest and simplest structure. This is a great strategy for initial startup and micro businesses. However, as your business grows changing to another type of structure can be beneficial. Deciding which structure is best for your business can be quite complex. However, as this example highlights, there are two reasons you need to get it right.
If used properly, Discretionary Family Trusts, can protect your assets, provide for succession planning and save you thousands in tax.
Essentially a Family Trust is an entity that can trade or invest in its own right. When it distributes profit each year, the trust doesn’t pay any tax itself. Instead the nominated trust beneficiaries are taxed according to their own marginal rates. We recommend all discretionary trusts use a company as the trustee for asset protection. Profit can be distributed to family members at the discretion of the trustee so it’s important that the trustee is owned by someone who you trust to control the income of the trust.
It’s difficult to illustrate the benefits as it depends on your individual circumstances but the example below compares owning a business as a sole trader, as a company and as a trust.