So you’ve got that burning desire to start your own business. You’ve honed your particular

product or service down to a sure fire proposition, you’ve researched the market, identified

the demand you’ll meet and it’s all systems go.

It’s an exciting time, but it’s also a time when you need to make decisions that could prove vitally

important down the track: under what structure to run your business, and how you will pay yourself –

whether you take a salary, drawings from income, or loans from the company.

These may be less exciting decisions than your website, your marketing plan and establishing your new

premises – but they’re absolutely critical decisions. Getting it right from the outset can save you both

headaches and money.

There are four main structures to choose from: sole trader status, a partnership, a proprietary limited

company, and a proprietary limited company as trustee for a trust (whether a discretionary trust or a unit

trust).

Sole trader status – or multiple sole traders operating in partnership – is easiest to set up: all that you

need is an Australian Business Number (ABN). You are taxed on the company’s net profit at your

individual tax rate, and end-of-year accounting is simple: all you need to do is produce a business profit

and loss (P&L) statement, and prepare a personal tax return based on the net profit.

A proprietary limited company requires a company name, Australian Company Number (ACN) and ABN.

You are creating a legal entity, which has the privileges of limited liability in the case of litigation orbankruptcy, and the company tax rate, but it has obligations in terms of documentation, record-keeping

and registration with the Australian Securities & Investments Commission (ASIC). The establishment and

annual tax and compliance costs are higher than for sole trader status.

A proprietary limited company as trustee for a trust has the added layer – of both responsibility and cost

– of establishing the trust and maintaining its accounts. At the end of each financial year, the trust is

required to distribute all of the trust’s profits – they cannot be kept in the trust.

The proprietary limited company-plus-trust structure is the least common, but the best, says business

coach and mentor Dr. David Dugan, of Elite Enterprises. “Entrepreneurs not only want to succeed, they

should also be thinking of protecting their business and their personal assets. But too many people stuff it

up by not getting the structure right and the appropriate insurances in place from the start.”

Dugan says the company-plus-trust structure gives business proprietors the most flexibility and the most

complete asset protection. “The downside of this structure, which is why people sometimes don’t want to

do it, is that at the end of the year you have to distribute all of the profits in the trust, whereas in a

company you can hold the profits in there.

“Also, it costs a little bit more to get a company and a trust set up. But it gives you much more tax-

effectiveness and flexibility in terms of your overall wealth creation strategy, which may have investments

outside your business,” says Dugan.

“Not enough small business owners are thinking at the outset about protecting themselves and their

assets, but they should be. That aspect alone makes sole trader status or a partnership a recipe for

disaster,” he says.

Once you have decided on the structure you want, you then have to think about how you will be paid. The

options here are salary, drawings from the business or loans from the business depending upon the

business structure.

Within these parameters can lie a great deal of complexity, which is why the structure and payment plan

must be in place from the very start, says GarryGodfrey, principal of business advisory company

Australian Business Clinic.

A lot of people are focused on costs at the outset, and want to do it as sole trader or in partnership,” says

Godfrey. “That’s fine if they’re prepared to be taxed at their marginal tax rate, and to accept unlimited

liability. Too many people don’t think about this, but sole traders and partnerships are liable for everything

– accidents, debts and liabilities.

If you’re a tree lopper, and you drop a big branch on a house, you could be sued for your personal assets.

The proprietary limited company structure has that essential layer of asset protection,” he says.

In most cases, Godfrey recommends a proprietary limited company with the owner drawing a salary.

“Ideally you would be an employee of your own business, being paid regularly, the pay-as-you-go (PAYG)

tax being taken out and remitted to the Australian TaxationOffice (ATO) with a group certificate and

director’s tax return at the end of the year, as well as the company tax return.”

Where company owners can get in trouble, says Godfrey, is if they have “a sole trader mentality,” and pay

themselves by taking money out of the business along the way. “Drawings do not work in a company.

That could be treated as a director’s loan, what the ATO calls a Division 7A loan.

Unless there is a formal loan agreement in place setting out the interest and repayment schedule, that

income could be deemed personal income, and taxed at the business owner’s personal tax rate,” he

says.

Regardless of what structure is established, Dugan says it’s a good idea to take a regular salary. “It’s

simply bad strategy to start off not being paid. If the business is going to sell product or services and

make money, from day one, every time money comes in there should be a certain proportion of that going

off to the tax account, to the owner – even if it’s a small amount – and to build up the business’ financial

buffer.

If that’s not happening, the business owner has to think long and hard about the business model and the

pricing,” says Dugan.

It’s important to get it clear in your mind before you start a business what structure will suit you best, and

also, how you plan to pay yourself. Getting this right from the outset can save you money – and help you

sleep better – down the track.

Your accountant, insurance broker or business adviser should be able to help you with advice. Before you

seek tailored advice, here’s a handy site to go over the alternatives:

https://www.business.gov.au/info/plan-and-start/start-your-business/business-structure.

This video also has the lowdown on the business structures you can use, and how tax may apply to each.

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