When starting or restructuring a business, one of the most important decisions to make is choosing the right business structure. This choice can significantly impact your taxes, legal obligations, personal liability, and ability to grow or sell your business in the future.

There are six main areas to consider when deciding on choosing business structures.

Everyone will have a different order when it comes to prioritising these, which is why there is no one-size-fits-all all business structure. Understanding these factors will help you make an informed decision that aligns with your business and life goals.

Let’s briefly look at each area and see how the three most common business structures —Sole Trader, Company, and Discretionary Trust— stack up.

1. Simplicity

What it means:

• Simplicity refers to how straightforward a business structure is to understand, set up and manage on a day-to-day basis.

Considerations:

1. Sole Trader: The simplest structure. Easy to set up with minimal legal and administrative requirements.
2. Company: More complex due to regulatory obligations (especially around how you draw money out of a Company), corporate governance, and compliance requirements.
3. Trust: Generally the most complex, involving a formal trust deed, how profits are taxed and ongoing management of trustee responsibilities (such as the Trust Deed).

Why it matters:

• Generally speaking, the more businesses and structures you have in place, the more complex the overall picture will look and potentially feel.While your accountants and advisors would handle most of the complexity for you, it’s still important to have an understanding on why you’re structured a certain way and how it all works at a very high level.For some people, the added complexity isn’t worth the added benefits.

2. Cost

What it means:

• Cost encompasses both the initial setup expenses and ongoing administrative, accounting, and compliance costs.

Considerations:

1. Sole Trader: Lowest cost. Minimal setup fees and lower ongoing expenses.
2. Company: Higher setup costs and annual fees (e.g., ASIC fees), plus additional accounting costs.
3. Trust: Higher cost due to setup of the trust deed, potential corporate trustee, and more complex accounting requirements.

Why it matters:

• If budget constraints are significant, or you prefer to minimize expenses, cost will be a crucial factor in your decision.This needs to be balanced with the size of business you want to create. Generally,for a small business the added costs could be significant in proportion to business earnings. As a business becomes larger, the ongoing costs become a smaller percentage of the business earnings.

3. Tax Effectiveness

What it means:

• Tax effectiveness relates to the ability to minimize your tax liabilities legally through the chosen structure.

Considerations:

1. Trust: Offers the most flexibility when it comes to tax planning. Income can be distributed to beneficiaries in a tax-efficient manner in any proportion the Trustee decides.
2. Company: Subject to a flat corporate tax rate (currently 25% for base rate entities), which can be beneficial if profits are retained in the company.
3. Sole Trader: Least tax-effective at higher income levels, as all income is taxed at your personal marginal tax rate.

Why it matters:

• If reducing your tax burden is a high priority, structures offering greater tax flexibility will be more appealing.

4. Risk Mitigation

What it means:

• Risk mitigation relates to how quarantined any business risk you take onwill be (i.e. loans, employees, malpractice etc)and whether the risk will impact your other assets and valuables.

Considerations:

1. Company: Provides limited liability protection meaning that generally any risk is contained to within the Company. There are exceptions to this when it comes to certain personal guarantees a Director makes, certain tax debts and whether a Director has been negligent in their duties.
2. Trust: Can offer similar asset protection benefits to a Company, especially if a corporate trustee is used.
3. Sole Trader: Personal assets are exposed to all business risks and liabilities.

Why it matters:

• If your business operates in a high-risk industry or you’re concerned about personal liability, structures that offer asset protection are preferable.

5. Ownership Flexibility

What it means:

• Ownership flexibility is about how easily you can bring in additional owners or investors into your business.

Considerations:

1. Company: Highly flexible. You can issue shares to new investors or partners.
2. Sole Trader: No flexibility. The business is tied solely to you.
3. Trust: No flexibility. Discretionary trusts have no token of ownership to give people as a representation of their stake,

Why it matters:

• If you foresee taking on partners or investors, or want the option open for the future, ownership flexibility is key.

6. Ease of Sale

What it means:

• Ease of sale refers to how straightforward it is to sell your business or transfer ownership when the time comes including how tax efficient that transaction can be.

Considrations:

1. Sole Trader: Selling a business as a sole trader is the most straightforward and you could potentially access heavy tax concessions on the sale (50% General Discount and Small Business CGT Concessions).
2. Trust: In most cases, you would never sell the Trust, you would sell the business out of the Trust. Depending on where the sale proceeds are taxed, youcould access the same tax concessions that a Sole Trader can.
3. Company: Can sell shares or the business as a whole, but potential buyers may be cautious when buying the whole Company. For this reason, sometimes selling a business out of a Company structure limits the tax concessions compared to the other structure types. This is not always the case however and will come down to how the business sale is structured.

Tax Considerations on Sale:

• Trusts and Sole Traders: May have access to small business CGT concessions, potentially reducing tax payable on sale.
• Companies: Access to CGT concessions can be more complex, and companies don’t receive the 50% CGT discount available to individuals and trusts.

Why it matters:

• If building to sell plays a big part of your strategy, consider how each structure impacts the sale process and tax implications.

Conclusion: Prioritizing What Matters to You

Choosing the right business structure is all about balancing these six factors based on your personal and business priorities. There’s no one-size-fits-all answer.

What should you do next?

• Reflect on Your Priorities: Think about which of these areas are most important to you.
• Rank Them: Order the six factors from most to least important based on your goals.
• Be Ready to Discuss: Share these with your advisor so they can give you customised advice.

We hope you’re enjoying our blog, just a note though. The information provided here is intended for general informational and educational purposes only. While we aim for accuracy, we can’t guarantee that this content will apply to your specific situation—every business owner’s circumstances are unique.

This blog is not a substitute for personalized advice from a qualified accountant, tax advisor, or any other professional. If you have questions specific to your individual circumstances, we strongly recommend consulting a professional for tailored advice.