When someone decides to go into business for themselves, their first decision is whether to buy an existing business, or to start from scratch. Both approaches have different priorities. An existing business should have some type of structure because it is already trading, but the start-up usually is a one or two-person operation without structure but with competing demands. The most critical demand gets the attention first, and in these early stages, the business structure is often left to be sorted out later.
This is a common mistake that would-be entrepreneurs should be addressing early in the life of their fledgling business. They can choose from four different structures here in Australia, and each one has implications for taxation, personal liability, degree of control and the ongoing costs and amount of administration required.
Sole Trader Structure
The sole trader option is simple to set up and operate and gives the owner full control over all operations of the business. It also makes the owner fully responsible for everything related to the business including any debts and losses. It is a low-cost structure with minimal reporting requirements but puts all personal assets at risk if anything goes wrong.
A partnership has two or more people involved who distribute income and losses between themselves. There are three different types of partnerships with key differences, but again, they are relatively easy and inexpensive to set up. The partners require separate tax file numbers (TFNs) and each partner pays tax on their share of the net partnership income each one receives.
A company business structure is more difficult to set up than the others and business operations are controlled by directors and owned by shareholders. A company is a separate legal entity with obligations under the Corporations Act 2001. Company members have limited liability and directors must understand and comply with all legal obligations.
A business can be operated as a trust, but this structure can be expensive to set up and operate. A trust must operate under a trust deed that formally sets out how it is to be run, and the trustee is required to undertake formal yearly administrative tasks.
This is just a brief summary of the four most common types of business structures. There are many more issues to be understood and addressed before deciding on the best structure for the business. The best way to make the right decision is to discuss the options with an accountant.
Once the business is up and running the time may come when the owner decides to plan for retirement and set up a SMSF (self-managed superannuation fund). After running a successful business, the owner would be familiar with the business structure, the accounting methods, the formal reporting process and the tax requirements. This may lead them to think that, because they have business experience, getting a SMSF started will be easy.
However, the structure and operating processes surrounding a SMSF are completely different to a business. The administration is complex, and the reporting required by the ATO (Australian Taxation Office) is specific and time critical, with penalties for non-compliance. Business owners wanting to take control of building their own wealth for retirement engage companies like SMSF Assure to handle the administration and reporting of their SMSF while they get on with managing their business.