With any start up business in Australia whether it be an online or traditional business, determining what legal structure to implement is quite important.
This doesn’t need to be confusing at all and for most people who are not business savvy there are basically three common business structures available when starting an online business.
The three common structures are:
– Sole trader
These structures are discussed further in the following sections.
The First Structure – Sole Trader
The first structure is becoming a sole trader, which is common with an owner operating alone who would prefer to manage and control all aspects of their business directly. There are advantages in adopting a sole trader structure and a few of these are;
– Low costs to set up
– Complete control of the business and all profits that are made are retained
– There are less legal and tax issues involved the majority of the time.
– You’ll be able to save money by not having to hire an accountant.
Furthermore, if you ever plan on selling the business, you also retain any after tax proceeds gained.
While being a sole trader, usually you’ll be required to use your own resources to acquire finance and if you haven’t employed any workers, you’ll need to manage and maintain all these aspects of the business alone.
In short, you are responsible and in control of all areas of your business.
The Second Structure – Partnership
The second type of structure available when establishing an import business or any business for that matter is a partnership or joint ownership. This means that you’ll be running your business with more than one person as partners, and any profits derived will be jointly shared.
This may be useful if you’d like to have an associate, wife, husband or family member together running the business as equal members. Keep in mind that in a partnership arrangement, everything is shared including assets and liabilities.
However, on the brighter side, you’ll have more people to assist you in building and maintaining the business, and have the opportunity to assign certain partners to different areas of operation.
The disadvantage however, in this particular structure, is that if one partner is liable or fails to perform or incurs a debt, all the partners share the same liability and can lose their own private assets such as home, contents and vehicles to cover any shortfalls.
Even though the business itself does not pay tax, all partners will need to lodge an annual partnership income tax return on behalf of the business to show any income earned and whether there were any deductions claimed by the business during that year.
Under a partnership structure each partner must pay their own share of tax from the total income all partners earned. If you wish to arrange superannuation while under a partnership structure and as a member of this partnership, you’ll be also personally responsible in arranging any superannuation contributions and arrangements as legally you’re not considered an employee of the business.
However just as in a sole trader structure, if hiring any employees, you’ll also be required to provide superannuation contributions for each worker.
The Third Structure – Company
The third type of structure available when establishing an online or traditional business is a company. As an incorporated company, your structure is slightly more complex and usually the startup costs and fees are higher in comparison to other business structures.
In Australia, all registered companies are regulated by the Australian Securities and Investments Commission (ASIC).
A company structure is its own legal entity and has its own rights, therefore the company can enter into agreements, acquire finance and purchase assets in its own name.
Directors of the company also become shareholders and depending on how many directors there are, a particular percentage of ownership or number of shares is allocated to each director or investor in the company.
Having a company structure certainly can provide benefits, especially tax wise, because not only does a company pay tax on its own profits, every company pays tax at a flat rate of 30%, which is certainly an advantage for businesses with high profit levels.
You also receive the added attention of having greater asset protection and if debts are accumulated by the company, shareholders will not be liable.
However keep in mind that running a company does involve various fees such as yearly review fees and company fees. In addition if any changes of details are required including change of ownership and change of address, you may be charged a fee if engaging the services of an accountant or solicitor to handle such changes on your behalf.
If a director is paid by the company by way of wages or directors fees, then these income figures will need to be shown in their individual tax returns and tax will need to be paid on these wages or fees at the current individual tax rates.
The issue of paying superannuation is very similar for a company as it is for any other structure. If the company employs any workers, it is the responsibility of the company director/s to provide super contributions.
So Which Structure is the Best?
Unfortunately, there isn’t one common answer or choice, however, what we recommend all clients use when establishing a new business, whether it be online or off-line as in a retail store for the first time, is to consult an accountant or solicitor to provide you with the best tailored solution for your situation.
We do find however, that most startup businesses tend to prefer the sole trader structure given its minimal startup and ongoing costs, manageable taxation, and personal control.
Once your business has flourished, after say six months to two years, you may then consider adopting a more complex structure such as a company, where many benefits are derived including asset protection, however, we recommend that you consult a professional prior to making such decisions.
If you do require further information regarding this area, please feel free to contact our office on 1300 018 957 or visit our website at www.onlinewealth.com.au.