Small Business

Choice of Business structure and financing method

Whether embarking on a new business venture or restructuring an expanding business it is important to decide on a business structure pertinent to your circumstances, and asset protection required.

The major entities that would be used to carry on a business or hold income-producing assets are a sole trader, a company, a trust, unit trust or hybrid unit trust or a partnership or limited partnership. The choice of entity is linked, to some extent, with the choice of the financing to be used for the acquisition of assets. For example, only a company can issue shares.

The choice of entity will usually involve a number of non-tax as well as tax considerations. In addition, different issues arise depending upon whether it is an original choice of entity or a reorganisation from one form of entity to another.

Some of the non-tax matters to consider include:
  • limited/unlimited/joint and several liability of the owners;

  • duties and potential liability of officers (eg directors) or other parties (eg trustees);

  • formation costs;

  • registration and annual return requirements;

  • continuing administrative costs (eg secretarial work, filing fees); and

  • flexibility - in relation to directing returns to different owners (or beneficiaries in the case of a trust) and issuing, redeeming and transferring interests in the entity.

Income tax issues to consider include:
  • rate of tax;

  • flow through of losses;

  • consequences of transferring or redeeming interests in the entity;

  • flexibility with income splitting;

  • loss of concessional CGT treatment (eg on disposal of active assets of a small business) upon making distributions;

  • stamp duty consequences on original documentation, method of transferring assets into structure and transfer of property as part of a reorganisation;

  • availability of rollover relief under the CGT and capital allowances rules if assets are transferred;

  • ability to offset losses against profits of another entity, through consolidation;

  • ability to achieve other efficiencies and benefits by including the entity in a consolidated group;

  • method of financing - debt or equity, redeemable or non-redeemable shares or units, convertible notes etc in terms of method and form of returning profits, CGT consequences on distribution, sale or release, anti-avoidance provisions (eg thin capitalisation) and saleability;

  • use of multiple entity structure - holding and subsidiary companies, corporate or non-corporate trustees, holding vehicles, subsidiaries or branches in listed or non-listed countries, tax havens or tax treaty countries; and

  • anti-avoidance rules that are specific to each type of entity.

Contact us to discuss in detail the best entity for your current needs with one of our friendly accounting staff.