What’s in a name?
When choosing the business structure best suited to you, it ultimately comes down to the name, and nature of the structure.
Each business structure has advantages and disadvantages and each needs to be considered holistically – with both your current and future needs in mind.
For example, becoming a ‘Company’ gives you the denomination Limited at the end of your name which looks impressive – but what else does this give you? As a shareholder of a standard company you have limited liability * and a flat tax rate of 28% (which sounds pretty good). However, some of the disadvantages are that all losses remain in the company and cannot be distributed to you as the shareholder, plus capital gains are only able to be realised on the dissolution of the company.
In a Look Through Company (LTC), the limited liability status remains; however all profits and losses are passed through the company structure to the shareholders – and then taxed at the individual tax rate. Simply put, an LTC can allow for business operations where losses are common (such as residential rentals) to pass the losses directly to the shareholders (which can provide a tax benefit to the individual shareholder).
Becoming a Trust also has its advantages. The trust structure is relatively flexible and can provide for income-splitting and the distribution of capital gains to family members involved in your business. Trusts are often used for asset protection. However operating trusts must comply with trust law. From a tax perspective, income retained in a trust is taxed at the highest flat tax rate of 33%.
Sole Trader and Partnerships
For simplicity, we always recommend you first look at operating as either a sole trader or partnership. All profits are taxed at the progressive individual tax rate. However, you need to keep in mind you have unlimited liability*.
So what’s in a name? The answer is everything, from your ability to access funds from the bank to the amount of tax you are required to pay.
Are you setting up a new business venture or purchasing a property? Talk to us first to ensure you have the best possible structure for your individual situation. Call us now on 0800 755 333 for a no obligation discussion.
*Limited liability typically means that your personal liability is limited to the assets of the company. In practice, if a creditor comes after you, they can only take the assets of a company, not your home or car or other personal assets. There are exceptions if you’ve been negligent in some way, as a director. But it’s a useful protection!