Winning a championship is tough, finding a partner is tough, but running a business is by far much tougher. Just imagine putting in the time, effort, and hard work only to discover that you’re in the wrong business structure, flushing thousands and thousands of dollars down the drain. It may not seem like an immediate threat, but the implications can impact all facets of your business, from paperwork to the risk of losing your assets and the inability to raise sufficient funds.
Let’s explore the significance of having the right business structure through an example that sheds light on the major factors affecting businesses, both new and established.
The Tale of Toni's Cleaning Business
Take Toni, for instance, who operates a cleaning business. Cleaning seems risk-free, right? You tidy up, and you’re done. However, Toni’s son played a prank on him by swapping the detergent with bleach. This seemingly innocent act resulted in Toni mistakenly using bleach, causing extensive damages worth over $150,000. To make matters worse, his son uploaded the whole incident on YouTube, garnering over 200 million views – someone won, but, unfortunately, it wasn’t Toni.
Now, let’s dig into the first major consideration for business owners – the associated risk with their business structure, using Toni’s example:
Sole Trader:
In the case of a sole trader business structure, the repercussions of Toni’s unfortunate incident could be quite severe. To cover the substantial damages caused by the bleach mishap, all of Toni’s business equipment would need to be sold.
If, however, the sale of these assets falls short of covering the costs, Toni’s personal assets, including his car and even his house, may be liquidated to compensate for the damages. This can happen to you too. So, in essence, your personal and business assets are considered one and the same in this structure, leaving your financial well-being at great risk.
Company:
Now, let’s consider the implications under a company structure. Here, the business and its assets are viewed as separate entities from Toni’s personal possessions. This applies to all business companies like that of Tony’s. In the unfortunate event of the bleach mishap, all business assets would indeed be sold to repay the substantial damages.
However, the advantage of this structure is that if the sale of these assets does not fully cover the costs, Toni’s cleaning business would be liquidated, but the matter would cease without further implications for Toni’s personal assets. This distinction highlights the protection provided by a company structure, safeguarding an individual’s personal assets from business-related liabilities.
Trust:
In a trust structure, things become a bit more intricate. Within this arrangement, there’s a trustee who serves as the nominal owner of the assets, holding them for the benefit of other beneficiaries, including Toni and you alike. In specific scenarios, such as the one involving Toni’s bleach mishap, there might be an opportunity for him to be loaned money from the trust to settle the debt incurred due to his son’s prank.
However, it’s crucial to note that this loan, though offered as a lifeline, would need to be repaid over a defined period of time. The trust structure provides a unique way to manage assets and finances, offering certain advantages but with its own set of regulations and responsibilities.
By considering the risk associated with various business structures, you can potentially save thousands of dollars in unexpected costs due to unforeseen incidents. In Toni’s case, the best business structure to protect his personal assets and mitigate risk would be a company with limited liability. If you would like to know more about it, here are The Different Trust Types in Australia You Need To Know.
The Second Major Consideration: Tax Implications
The second major consideration when determining your business structure is the tax implications it carries. Sole traders are required to pay income tax, while companies are subject to a 30% company tax, unless their turnover is less than $10 million, in which case they pay only 27.5%. As a rule of thumb, if your business generates lower revenue, a sole trader structure may suffice.
However, as revenue and turnover increase, the company structure becomes more appealing. Moreover, implementing trusts, although slightly more complex, can be a significant tax-saving strategy. It allows you to distribute funds within the trust to beneficiaries, potentially putting thousands of dollars back in your pocket. To make it easier for you, we offer multiple services solving your tax implications. Here are all the things we can do for you at Osyter Hub.
Wrapping Up
In conclusion, choosing the right business structure can be a game-changer, offering financial security, protection of personal assets, and tax-saving opportunities.
At Oyster Hub, we’re dedicated to helping SME business owners optimize their business structures and finances, giving back their hard-earned dollars through proven strategies that have saved more than $19,800 in taxes.
Life-changing coaching from Adarsh and Vik at #OysterHub is making the holiday season come early for these entrepreneurs. Call us today and get the best services in town!
