What you need to consider when selecting a business structure

Article by Danny Riggs

The structure you choose will have a significant impact on your business operations, financial outcomes, and legal responsibilities but here are some factors you should consider first:

1. Asset Protection: Safeguarding Your Personal Wealth

One of the primary concerns when choosing a business structure is asset protection. Essentially, you need to assess the “risk” associated with your business activities and decide whether you want to shield your personal assets from potential liabilities.

Certain business structures, like a company or trust, offer greater protection to your personal assets compared to others, such as a sole trader. If your business operates in an industry with high risks—such as construction, manufacturing, or healthcare—it’s especially important to consider structures that separate personal and business liabilities.

For example, a company structure provides a “limited liability” feature, meaning that the financial risks of the business are generally confined to the company itself. This can offer significant peace of mind, particularly if your business is exposed to legal action or other potential financial risks.

2. Compliance Costs: Balancing Expenses and Benefits

Every business structure comes with its own set of compliance obligations, and these can translate into ongoing costs. Compliance costs can include things like annual tax returns, financial statements, audits, and even legal fees depending on your structure.

A sole trader or partnership typically has lower compliance costs due to simpler reporting requirements. However, as your business grows, a more complex structure such as a company or trust may be necessary—though these structures come with higher compliance costs.

It’s crucial to weigh up the costs of compliance against the benefits of each structure. For instance, a company may offer better tax advantages, asset protection, and credibility, but these benefits need to be balanced against the additional costs of meeting legal and accounting requirements.

3. Licensing and Business Registration: Ensuring Legal Compliance

Different industries and sectors have distinct licensing and business registration requirements that must be adhered to. Certain business structures may be unsuitable or incompatible with specific licensing regulations. For example, in the Building and Construction industry in Queensland, a trust structure is not commonly used due to the QBCC requirements.

Before deciding on your business structure, it’s important to research and confirm the relevant licensing or registration requirements for your industry. Non-compliance with these regulations can lead to legal issues and financial penalties, so it’s best to consult with a professional who understands the requirements of your sector.

4. Future Plans and Growth: Choosing a Structure That Scales

As you plan for the future of your business, consider how your business structure will support your long-term goals. Do you plan to expand? Will you take on business partners or seek external funding? Some structures are better suited for growth than others.

For instance, if you’re considering bringing in investors, a company structure may be a more appropriate choice. Companies offer flexibility when it comes to taking on new shareholders, and they can also make it easier to transfer ownership or sell the business in the future.

On the other hand, if your future plans involve keeping the business relatively small or run by a single individual, simpler structures like a sole trader or partnership might be sufficient.

5. Tax: Managing Your Tax Liabilities to Boost Cash Flow

Each structure has its own tax advantages and disadvantages, and how you manage your taxes can have a direct impact on your business’s cash flow and profitability.

For example, a company structure is subject to a flat corporate tax rate, which may be more advantageous than the progressive tax rates applied to sole traders or partnerships. In contrast, a trust structure can offer tax flexibility, allowing profits to be distributed to beneficiaries in a tax-effective manner.

Understanding how your business will be taxed under different structures is vital. You want a structure that allows for efficient tax planning, which could result in increased cash flow and more opportunities for reinvestment in the business.

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Final Thoughts: Making the Right Decision for Your Business

Choosing the right business structure is a pivotal decision that will affect your business operations, financial outcomes, and legal obligations. By carefully considering these factors, you’ll be better equipped to make an informed choice that supports both your immediate needs and long-term goals.

At Sammut Bulow, we understand the importance of getting the right advice and making strategic decisions for your business. Our team of experts is here to guide you through the process and help you choose the optimal structure to set your business up for success. If you’re ready to explore your options, contact us to schedule a consultation.

Disclaimer: The information provided on this blog is for general informational purposes only. While we strive to ensure that the content is accurate and up to date, the advice and information provided on this site should not be construed as a substitute for consulting with a qualified accounting or tax professional. The authors and contributors to this blog do not accept any responsibility or liability for any errors or omissions in the content, or for any losses or damages arising from the use of the information provided.