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Business Structure
BUSINESS SKILLS

The Most Effective Way to Structure a Business

EDITOR IN CHIEF

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How you structure you business may not be the world’s most exciting topic but it is a vital one with substantial long-term impact, and by substantial, I mean potentially amounting to millions of dollars worth, depending on the success of your business.

The structure of your business will be driven by a variety of factors including:

  • Type of Business – Some businesses require a particular structure in order to operate effectively and within the legal requirements of a country.
  • Asset Protection – The structure of your business may have a bearing on your personal liability in the event that the business is sued.
  • Tax Implications – The way a business is structured can have immediate consequences in terms of the taxes it will pay year by year, but it can also have a substantial impact when the business is sold.
  • Ongoing Costs – Each structure has different costs and regulatory obligations.
  • Your Customers – Your customers may prefer to only deal with certain entity types based on either perception or recourse.

TYPES OF STRUCTURE AVAILABLE

Please note that these business structures will vary from country to country. For the most part, they will be similar, just with different names and tax rates. Irrespective of the similarities, it is important to do proper research to understand the implications of each structure in relation to your objectives.

Sole Trader

A “Sole Trader” is a type of business structure that is both run and owned by one person and in which there is no legal division between the owner and the business.

Advantages

 – It is simple and inexpensive.

 – The business income is treated as your individual income and you are solely responsible for any tax the business must pay.

Disadvantages

– As a sole trader, you pay the same tax as individual taxpayers, at personal income tax rates.

– No asset protection. If your business is sued, your personal assets are exposed.

Partnerships

A partnership is an association of people who carry on a business as partners or receive income jointly.

Advantages

– A partnership is relatively inexpensive to set up and operate. A formal partnership agreement is common, and while not necessarily legally required, it would be foolish not to have one.

– If you operate your business as a partnership, control or management of the business is shared. Income and losses are shared among the partners and they are then taxed at their respective marginal tax rates.

Disadvantages

– Each partner is responsible for the debts of the partnership, even if you did not directly incur or cause the debt.

– No asset protection. Like a sole trader, your personal assets may be exposed. In fact, there is the risk that the mistakes of one partner, could lead to you being liable.

Companies

An incorporated company is a distinct legal entity in its own right. The ownership units of a company are called “shares” and they are held by the shareholders, from as little as one to millions.

Advantages

– Its directors control a company’s operations and its shareholders own the company.

– A company provides some asset protection but directors can be legally liable for their actions and, in some cases, the debts of a company.

– If you run your business as a company, the money the business earns belongs to the company, and the tax is paid by the company at corporate tax rates.

– The life of a company is not restricted by the lives of the partners.

Disadvantages

– A company is a complex business structure, with higher set-up and administrative costs because of the additional reporting requirements.

Trusts

A trust is an obligation imposed on a person – a trustee – to hold property or assets (such as business assets) for the benefit of others. These others are known as beneficiaries.

Advantages

– If you operate your business as a trust, the trustee is legally responsible for its operations. A trustee of a trust can be a company, providing some asset protection.

– If a trust is carrying on a business each year, all income the trust earns and deductions it claims for expenses that it incurs in carrying on that business, must be declared on a trust tax return. The tax return also shows the amount of income distributed to each beneficiary.

– The beneficiaries pay tax based on the income they receive at their marginal tax rates.

– Depending on the type of trust, there can be considerable flexibility with the distribution of income and capital to beneficiaries.

Disadvantages

– A trust structure is generally complex and can be expensive to establish and maintain.

– It can be difficult for trusts to borrow due to increased complexities.

– Trustees, who control the trust, are restricted to the rules of the trust deed.


So which structure is right for you?

There is not necessarily a “right” or “wrong” when it comes to the choice of your business structure. However, the impact of your choice can be significant, making the case for seeking professional accounting and legal advice a wise decision.include asset protection and taxation objectives.

 

 

Article Overview
The Most Effective Way to Structure a Business
Article Title
The Most Effective Way to Structure a Business
Description
Business structures will vary from country to country. For the most part, they will be similar, just with different names and tax rates.
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Publisher Name
Christianwealth
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