What entity is best for my business?

One of the most common questions we are asked as specialist accountants for small businesses is: What entity should I use to run my business? It is a great question; correctly setting your structure will make a big difference. North Advisory specialises in accountancy for small businesses. Located on Sydney’s Northern Beaches, we serve an eclectic array of small and medium businesses locally and nationally.

Our experience and expertise enable us to provide targeted and personalised advice on the most suitable financial structure for various business types.

While mainstream media, social media, and, of course, Google have a labyrinth of information and advice on the topic, much of it relates to companies and trusts.

Looking at your situation simply from a tax benefit position may bring you unstuck, and there are several considerations before deciding on the most appropriate approach for your circumstances. Let’s take a look.

The nature of your business plays a pivotal role in determining the best structure for your business. If you offer consulting, legal advice, or allied healthcare services, you might think a company or trust structure will reduce your tax. However, the Australian Tax Office (ATO) often treats income from these service-based businesses as Personal Services Income (PSI), which means the income is taxed at your personal rate, regardless of the structure.

Now, the story changes if you’re in manufacturing, retail, or any business where selling goods is your primary focus. These businesses often benefit from more complex structures like a company or trust because their income isn’t as tightly linked to the personal efforts of one individual. This approach can open doors to tax planning opportunities and liability protection.

The next consideration is servicing your customers. If it’s just you running the business, a more straightforward structure might be sufficient. But the moment you start employing others, things get more complicated—and that’s where a company structure shines. It makes managing payroll, superannuation, and compliance far more straightforward. Plus, it separates your personal finances from the business, which is crucial for managing risk.

Having employees also introduces obligations, like workers’ compensation insurance and compliance with employment laws, so having a formal structure can help you stay on top of these.

Every industry comes with its share of risks. For example, if you run a family business and own your home, you’ll want to protect those personal assets from potential business liabilities.

A company structure—like a Proprietary Limited (Pty Ltd)—creates a boundary between your personal and business liabilities. In riskier industries, this separation can be a lifesaver.

If your risk tolerance is low, consider layering your protection with a trust that owns the company. This extra step can act as a buffer, shielding your assets from unexpected challenges.

Now, we all go into business with an eye on the bigger prize. Owning a business has pros and cons, and for those of you who have done it before or are doing it now, you’ll be well aware of the struggles and the highs associated with owning and building something.

So, let’s dream a little.

Are you building something that will grow and scale? Maybe you’re thinking about eventually selling the business or passing it on to the next generation. Either way, your chosen structure lays the groundwork for future success.

Planning for growth often means choosing a structure that allows for reinvestment and the ability to bring in external partners or investors. Likewise, if selling is the endgame, the right structure makes your business more attractive to buyers and minimises the tax impact on a sale.

Yes, setting up the ideal structure involves some upfront cost and effort, but trying to fix a poorly chosen structure later is far more expensive and stressful. Speaking with experienced and qualified professionals ensures you get it right the first time.