Contents
Introduction
When you run a business, choosing the right business structure is crucial. This decision isn’t just for when you start but can arise later if changing the structure becomes beneficial. You can operate a business as a sole trader, in a partnership, through a company, or via a trust. Sometimes, a combination of these structures, like a partnership of companies or trusts, is possible. Each structure offers specific advantages and disadvantages, especially regarding taxation.
Partnerships: Flexibility with Risks
If you opt for a partnership as your business structure, you take on joint and several liabilities for any debts incurred by the partnership. This can be risky, but partnerships give you flexibility to split income for tax purposes. Additionally, any tax losses from the partnership can offset your other income, which is often helpful during the early stages of a business. In contrast, tax losses in companies and trusts stay “locked in” until they can be offset against future income.
Companies and Trusts: Managing Risks and Taxes
A company or trust business structure offers different levels of protection and tax advantages. Family trusts allow flexible income splitting, while companies and unit trusts offer similar benefits, though in a more rigid way. Losses in companies and trusts remain within those entities until there’s income to offset them, following complex rules. You can change your business structure over time without facing tax consequences, thanks to roll-over concessions.
Roll-Over Provisions and Small Business CGT Concessions
The roll-over provisions for small business let you restructure from a sole trader or partnership into a company or trust without adverse tax consequences, as long as you meet eligibility requirements, such as maintaining beneficial ownership. These provisions also allow moving a small business into a discretionary trust structure, which brings tax benefits. If you trigger a capital gain during restructuring, the CGT small business concessions can reduce or eliminate the gain.
Starting or Restructuring Your Business
Whether you’re starting a new business or considering a restructure, it’s important to understand how the right business structure affects your tax position. The right structure from the beginning or flexibility to change later can significantly impact your tax outcomes. Speak with us to explore the most tax-effective structure for your business.
WL Advisory is a Chartered Accounting firm. We specialise in accounting, tax, and advisory services for individuals and small businesses. Please visit our website for more information.