Business Structure

There are a number of ways to organise your business structure.  Many tradespeople become subcontractors and simply work for themselves.  These contractors for example, are often sole proprietors or sole traders.

Partnerships used to be very common, but they do not offer a reasonably limited liability (from damages or lawsuits) and in effect and not very flexible for taxation purposes.  Partners in a partnership are personally responsible for the debts of the partnership no matter who incurred the debt within the partnership.

Most proprietary limited companies (Pty Ltd) in Australia are not trading companies but act as trustees for trusts.  The big danger with Pty Ltd trading companies (also called private companies) is that directors, shareholders, or associated people “borrow” from the company and this attracts what is called a Division 7A loan.  The Australian Tax Office (ATO) now applies what we call a benchmark interest against the loan.  The government determines the interest rate from year to year. 

Now what happened many years ago is that directors or shareholders would take money out of the company with no intention of repaying it, let alone paying interest.  The company pays, generally speaking, a reduced rate of income tax compared to an individual.  But when directors or shareholders take money out of the company, they are not paying tax on it when in fact, it looks a bit like an unauthorized salary.  The big danger with people running trading companies is that they take money out of the company that is not salary or repayment of a loan.  People get into all sorts of difficulties when this happens and the ATO can get very aggressive when it comes to these types of arrangements.

A discretionary trust is similar to a flexible partnership, but it is not a partnership.  The profit sharing can vary from year to year and it also has the ability to “stream” the taxable income to beneficiaries for the best tax payable ratios.  Trust comes from the days of the Crusades when that landlord would levy death duties on property or estates.  This occurred when the men went to fight and were deemed to be dead if they were not heard from after some reasonable time.

A trust was invented, which in those days did not terminate.  These days, a trust has a lifespan of 80 years.  It is a very flexible arrangement and most businesses trade through a trust.  A trust is peculiar to the Anglo countries and in some countries, it is called a fiduciary.

So in summary, there are numerous business structures available but it is suggested very strongly that a private trading company is fraught with danger.