Before setting up an entity, make sure you have received structuring advice.

What structure should I use?
This is the most common question we hear in our office every day. It is usually the reason why we first meet our clients. It is the most important question you should ask before starting any business venture. There are four options:
Sole Trader
Partnership
Trust
Company
Sole Trader
This is the most commonly used structure. This is when an individual gets an ABN and starts running a business.
Advantages | Disadvantages |
·        Cost nothing to set up ·        Do not need to provide annual financial statements  | ·        No asset protection ·        Personal marginal tax rates apply |
Partnership
Another common structure that is used. Unfortunately, very few people get a partnership agreement in writing. Particularly where the partnership is between a husband and wife. This type of entity still requires a separate ABN and TFN.
Partnerships are not always between individuals. Sometimes they are between companies, trusts, super funds, etc. They can be very effective, particularly when there is a partnership agreement in place.
Advantages | Disadvantages |
· Minimal set up cost · Can make the partnership a different split besides 50/50 | · No asset protection · The partners can be held equally liable regardless of their profit share. · Need to provide annual financial statements |
Trusts
There are many different types of trusts, some of which don't exist unless someone has died.
Discretionary Trust (the most common)
Unit Trust (Also known as a Fixed Trust)
Testamentary Trust (Can only be created by a Will on the passing of someone)
Special Disability Trust (Can only be created for eligible family members. Gifting can be made through a Will or from eligible family members)
Self Managed Superannuation Fund - yes! Your read that right. This is a form of a Trust
Businesses can only make use of either a Discretionary Trust or Unit Trust. Again, it will require its own ABN or TFN. All income must be distributed to beneficiaries every year. Any income that is not distributed has to pay the top marginal rate of tax. This is paid by the trustee. This is one of the most commonly used structures because it provides the flexibility to be able to distribute to individuals, companies, other trusts, etc. The Australian Taxation Office hates trusts and has been trying to get rid of them, unsuccessfully, for many years. There are many tips and traps that you should be aware of when using a trust.
Advantages | Disadvantages |
· Asset protection · Flexibility for distribution of profits (discretionary only) · Succession planning is possible · Able to pass on capital gains discounts on the sale of capital assets when distributed to individuals | · Need to provide annual financial statements · All income must be distributed each year, or top marginal tax rates apply · Income that is declared must actually be distributed to the person/entity that has been nominated. |
Company
For those that are serious about business, this is where we start. It is traded as a separate entity, provides the most asset protection and allows for bigger profits with a smaller tax rate. The only time this can't be maximised is when the income producer falls under the Personal Services Income (PSI) rules. This has another whole set of rules attached to it.
Advantages | Disadvantages |
· Asset protection · Treated as a person in that it pays its own tax · Tax rate is set at either 25% for an SBE or 30% · Succession planning is possible · Dividends have franking credits attached (where available) – ie company tax paid is not lost | · Cost to set-up · Need to provide annual financial statements · Dividends can only be paid where there are profits in that year or retained earnings from prior years · No capital gains discount for capital assets sold even if held > 12 months |
Getting it done right
More and more people are coming to our door because they have tried to set up their own entity directly through ASIC. The biggest issue we have is that the entity they have chosen is not always the best one, as they have not set it up "with the end in mind". The other issue is that they do not have the correct documentation attached to their entity.
Usually the structures are not correct, people do not know how to apply for a tax file number or other registration requirements. Correcting a structure can be very costly in tax, capital gains and duty. For those that are directly obtaining a company from ASIC, they are not necessarily being provided with the correct documentation required to set up a company - including a company constitution. Where the correct documentation is not being completed, then you are not complying with the Corporations Act 2001 (Cth) , and the penalties can be huge (up to $18,780).
We currently obtain all the documentation for our structures from ACIS. They are a legal firm that deal directly with accountants to assist them in this area and they have many years of experience. They frequently represent clients in the legal system against other parties, such as the Australian Taxation Office. They provide us accountants with regular ongoing training and advice whenever it is required, ensuring that we are kept up to date with the latest legal outcomes as well as legislation changes. We do not pretend to be lawyers, and we definitely never recommend that anyone try and set up these entities on their own. The legal ramifications of something set up incorrectly when it all falls apart can be horrific.
By setting it up yourself, you're also not fully aware of everything that you can be held liable for. For example, if you are a director of a company, you can personally be held liable for any unpaid super, GST or PAYG Withholding. There are other things you should be aware of, such as director's loans and the tax ramifications if you don't address these each year. Having ongoing advice from both your accountant and your solicitor is vital when running a business, as when things go wrong, if you are not structured correctly, you can potentially lose everything you work so hard for.
We will try and make you work through your worst case scenario and ensure that you are protected as best as possible in each. If we identify that you need legal advice, we will definitely point you in the right direction. Book in to discuss what structure is best for you, and don't hesitate to contact us if you've done a DIY and you need help fixing it, we'll guide you through it.
More information
Referrals
To discuss any of the above further, you can ring me on 4021 2801.
''Problems are not stop signs, they are guidelines" - Robert H Shuller