The Backyard BBQ Business Structure Advice: “Mate, trust me, your new business should be running as a company like mine, what ya gotta do is BLAH BLAH BLAH…”
You’re certain to hear a lot of different advice. A few simple steps upfront can start you down the path toward success.
Talk to DGL staff who have been there done that.
Why choosing the right Business Structure is critical
Running a business is tough. No one wants to do all that hard work just to find themselves in the wrong business structure at tax time or when something goes wrong. The structure of your business has an impact on TAX.
Many business owners start as a Sole Trader, often because it’s the cheapest and simplest structure. This is a great strategy for initial startup and micro businesses. However, as your business grows changing to another type of structure can be beneficial. Deciding which structure is best for your business can be quite complex. However, as this example highlights, there are some fundamental reasons why you need to get it right.
Have you thought about the TAX factor?
The structure of your business has an impact on how much tax you pay.
How much tax do you pay if your taxable income is $120,000 in 2017, assuming your wife is at home raising the family with an 18 year old fully supported uni student (don’t you just love them!!??) and a 16 year old.
| Sole Trader | Company | Family Trust | |
| Tax Payable | $58,147 | $51,300 | $46,049 |
| Effective Tax Rate | 28.5% | 27.5% | 25.61% |
| Income Streaming Flexibility | None | Some | Complete |
There is a few assumptions but with this simplicity the outcome is clear: The right structure can save thousands of dollars in tax.
But wait there is more…
Let’s explore the intricacies of the Discretionary Family Trust
Essentially a Family Trust is an entity that can trade or invest in its own right. When it distributes profit each year, the trust doesn’t pay any tax itself. Instead the nominated trust beneficiaries are taxed according to their own marginal rates. We recommend all discretionary trusts use a company as the trustee for asset protection. Profit can be distributed to family members at the discretion of the trustee so it’s important that the trustee is owned by someone who you trust to control the income of the trust.
It’s difficult to illustrate the benefits as it depends on your individual circumstances but the example below compares owning a business as a sole trader, as a company and as a trust.
What if in this magical world the following scenarios are available:
Your parents are on Centrelink pensions.
| Your wife’s parents are self funded retirees with taxable incomes of $10,000 each | Sole Trader | Company | Trust |
| Profit | $180,000 | $180,000 | $180,000 |
| Less Your salary | $0.00 | $80,000 | $70,000 |
| Less Wife’s salary (exceptional bookkeeper) | $0 | $80,000 | $70,000 |
| Tax payable on profit | $58,147 | $5,700* | $0** |
| Add net salary Paid to yourselves (after PAYG) | $0.00 | $121,706 | $97,623 |
| Actual funds received for the year | $121,583 | $136,006 | $148,606 |
* Company tax paid of 28.5c
** Trust profit distributed as follows:
| Family Member | Profit Distributed | Tax Payable |
| Fully supported Uni Student | $18,000 | $0.00 |
| Wife’s Mother | $16,000 | $0.00 |
| Your Father | $6,000 | $0.00 |
With the scenario above, there is a significant saving to be gained from using a discretionary trust. Of course the outcomes of this scenario will vary according to the individual’s circumstances. Before recommending a business structure or a change to your structure we always analysis each business owners’ unique circumstances.
What are the next steps?
Understanding which structure is right for your business is complex. Before setting up your business, talk to us at DGL Accountants. If you’re considering changing your business structure for asset protection or tax purposes, book a chat, we will be happy to talk on all the pros and cons of all the business entity options.