Sole Trader vs Trust
What is the right Australian business structure for you?
Sole Trader or Trust……what’s the right Australian business structure for you? This might be one of the most critical business decisions you make – so getting it right is important!
Whether you’re a first-time entrepreneur or a seasoned business owner, selecting the right structure for your business can be challenging. There are multiple options, all with different pros and cons. Far too many business owners just skip this important decision altogether, effectively merging their personal and business interests and leaving themselves at risk. If you’re serious about going into business, then you need to get serious about properly structuring it.
When choosing the right structure for your business, these are the 4 most important criteria to consider:
- Your personal liability exposure from your business products or services
- Whether you have (or plan to have) partners or investors in the business
- The administrative costs of setting up and maintaining your business structure
- The tax effectiveness of the structure
So, before we look into each structure in more detail, let’s get a quick summary of each……
Being a Sole Trader is the simplest and least expensive option. This is designed for business owners who are the sole proprietors of their companies however this structure doesn’t give you much protection if things go wrong. Your personal assets are unprotected from any claims arising from your business.
A Trust isn’t an organisation at all, but instead a legal structure to hold assets. For example, you might set up a Trust to hold your business assets, then appoint a Trustee to manage them. Commonly, the Trustee is a Company and the Trust provides asset protection and limits liability from operating the business. Trusts are very flexible for tax purposes however a Trust is a complex legal structure and establishing a Trust costs significantly more than a Sole Trader.
Now let’s look at them in a bit more detail……….
As a Sole Trader your personal assets (e.g. your house) are at risk. When most people think of a small business owner, a Sole Trader immediately comes to mind. The Sole Trader structure is for individuals doing business on their own. This structure preserves your right to make all decisions about your business but clouds any distinction between your personal and business assets.
The costs of becoming a Sole Trader are minimal and the application process is relatively simple, compared to other business structures. Ongoing administration costs are also smaller. If all this sounds too good to be true, it just might be.
The ultimate downside of being a Sole Trader is that it places your personal assets at risk. Sole Traders are not fully separate legal entities from their owners, which means that if your business is sued, you could end up paying the costs from your personal assets. You’ll also be stuck personally with your business debts, including any tax obligations incurred.
In addition, being a Sole Trader doesn’t offer you any real tax benefits. All-in-all, this business setup is less than ideal.
A Trust provides asset protection and limits liability from operating the business. Beneficiaries (owners) of a Trust are generally not liable for Trust debts, unlike Sole Traders and Partnerships and the Trustee is normally incorporated as a Pty Ltd Company, to give the Trustee some protection from liability too.
The main benefit of operating a Trust is that it gives you flexibility in how income from the Trust is distributed. The Trust itself usually pays no tax but distributes its profits to the Beneficiaries each year. This gives you some tax planning flexibility (taking advantage of the different tax-free thresholds and personal tax rates of each Beneficiary) that the other business structures aren’t able to do.
Still have questions?? Please give Dean a call & he’d be happy to discuss your options.