As your business evolves, so do its needs—and the structure that once served you well may no longer be the most tax-efficient or protective. Many established businesses find themselves outgrowing their original business structure, often leading to missed opportunities for tax savings and asset protection.
In this article, we’ll explore the tax implications of different business structures in Australia, helping you identify whether your current setup is still suitable for your business’ growth or your changed financial circumstances. If not, Chan & Naylor can assist you in transitioning to a more appropriate structure to maximise your financial benefits.
Understanding Australian Business Structures
There are four commonly used business structures in Australia, each with its own tax obligations and implications:
- Sole Trader
- Partnership
- Company
- Trust
Sole Trader
A sole trader is the simplest business structure, where the owner registers an Australian Business Number (ABN) in his / her own name and is legally responsible for all aspects of the business.
Tax Implications:
- The business profit is combined with the sole trader’s other non-business income and taxed at the individual’s marginal tax rate.
- No need to lodge a separate tax return for the business.
- Unlimited personal liability, meaning your personal assets could be at risk if the business faces financial difficulties or legal disputes.
Who Should Consider This?
Sole trader structure is often ideal for business activities involving minimum contractual obligations, HR responsibilities, regulatory compliance restrictions and debts. For example, share trading. As the simplest business structure, it may be a easy to understand and cost-efficient option for start up / low profile business. For more information about taxes for sole traders, read more here.
Partnership
A partnership involves two or more people and / or non-individual entities sharing the profits and responsibilities of the business.
Tax Implications:
- The partnership itself doesn’t pay income tax. Instead, each partner pays tax on their share of the partnership’s income at their relevant tax rates.
- The partnership must lodge a separate tax return to show how profits and losses are distributed amongst partners.
- Partners are, jointly and severally, subject to unlimited liability for business risks, which can impact personal assets in the event of individual partner(s).
Who Should Consider This?
This structure is the V2.0 of sole trader structure allowing multiple people to run a business together while staying relatively simple from structuring perspective. The most common form is a partnership with a few individual partners. Like the sole trader structure, it’s lacking asset protection.
Company
Arguably the most common business structure in the last century, a company is a separate legal entity, meaning it has its own legal and tax obligations.
Tax Implications:
- Companies are taxed at a flat rate: currently 25% for small businesses and 30% for large business and passive investment companies.
- Dividends paid to shareholders may be taxed through the imputation system, which allows shareholders to receive a tax credit for the tax already paid by the company.
- Much less exposure to personal liability, thus better protecting directors’ personal assets from the majority of business risks.
Who Should Consider This?
A company structure is suitable for businesses looking for more complex operations, asset protection, and tax flexibility.
Trust
A trust is an entity where a trustee (either an individual or company) holds assets for the benefit of others (beneficiaries).
Tax Implications:
- Trusts generally don’t pay tax. Instead, the income is distributed to beneficiaries, who are taxed at their relevant tax rates.
- Trustees are responsible for lodging tax returns and ensuring compliance with tax obligations.
- A carefully designed trust may offer further asset protection and tax planning opportunities compared to company structure.
Who Should Consider This?
Trusts are often used for asset protection and estate planning, making them ideal for family businesses or those with significant assets they wish to protect.
Key Considerations for Choosing a Business Structure
When selecting a business structure, it’s essential to consider more than just the tax implications. Here are a few other factors to keep in mind:
- Liability: How much personal liability are you willing to accept?
- Complexity: Do you want a structure that’s easy to manage, or are you prepared to maintain a more sophisticated, and hopefully more flexible, business vehicle?
- Growth: Will this structure support future growth and the ultimate succession of your business?
Conclusion
Choosing the right business structure is one of the most important decisions you’ll make when starting or expanding a business. Each structure offers unique tax benefits and obligations, and it’s vital to assess how each aligns with your long-term financial goals. For tailored advice, consult with an expert like Ed, who specializes in tax strategies and asset protection for Australian businesses.
We’re Here To Help
Looking for expert guidance on selecting the best business structure for tax efficiency and asset protection? Contact Chan & Naylor today to schedule a consultation.
If you suspect you’ve outgrown your current accountant, seeking a second opinion could be the key to unlocking new savings and ensuring your business thrives. Contact Chan & Naylor Sydney today to schedule a consultation and discover how we can help your small business.
About Chan & Naylor
Established in 1990, Chan & Naylor has been a trusted partner for thousands of businesses and investors across Australia. Choosing Chan & Naylor Pymble means you’re not just selecting a service provider; you’re gaining a partner aligned with your business goals. You’ll have access to a dedicated client manager supported by a team of accountants that specialises in business tax and investments. Contact us today so we can discuss how we can help you.
Disclaimer
This article serves as general information only and may not account for the unique circumstances of individual readers. For personalised and strategic solutions tailored to your specific situation, we invite you to seek professional advice from Chan & Naylor. Our highly experienced team is dedicated to helping you navigate the complexities of Australian taxation, ensuring that your financial strategies align with the latest regulations. Contact us today to embark on a path of informed and customised tax planning for your property investments.
