“What is the best structure for my business?” This is a common question I’ve been asked of late from many prospective business owners either buying or starting up a business. I have been impressed by their appreciation of the importance of getting the structures right. There is an understanding of the risk involved and of the tax issues.
People buying a business realise there is risk in doing this and they want their home and personal assets protected in the event something goes wrong with the business.
They are pleased to know a strong wall between their personal assets and their business can be made. By buying the business in a company that wall is put in place.
There are two ways to buy a business in a company. One is directly in the company. The other is with the company as trustee of a trust. They both provide that solid wall of protection, but they have different tax benefits.
One of the benefits of owning a business is that if you run it well you can sell it for more than you paid for it. This is called a capital gain. For business owners there are a range of exemptions for capital gains. If you buy the business in a company there are limited capital gains tax exemptions. The exemptions only exist if you are over 55 years old.
On the other hand if you buy a business with a company as trustee of a trust you will be able to access most of the capital gains tax exemptions resulting in little or no capital gains tax being paid when you sell the business.
The income tax you pay is affected by the business structure you have. The company tax rate is 30%. Operating through a company will enable you to pay tax at no more than 30%.
A trust on the other hand is a flow through vehicle. A trust does not pay tax itself, but passes the taxable income through to family members or unit holders. This may not be a problem with moderate levels of profit, but could be if you have higher levels of profit.
If your profits are higher then you can have your cake and eat it too by operating through a company and owning the business in a trust.
Sometimes we see people with complex structures. These can be hard to understand and difficult to operate. With overly complex structures it easy to pay things from wrong accounts and undo the good of the structure. The best approach is to keep it as simple as possible, while meeting your needs of protection and tax.
Getting the structure right at the start is important. There is capital gains tax and stamp duty costs if you change after you have started the business. While the right structure may cost a little more it will protect those important assets and save you tax.