Choosing your business structure might seem obvious and fairly easy. But are you aware of all the possible structure models that you can use for your business?
The general way that people start a business is as a sole trader or through the creation of a partnership.
These have their share of benefits but you should be aware of the negative sides.
When it comes to taxes, you might start off low as an individual or through a partnership. But things can change severely in the long run.
Regarding asset protection, you are generally more liable when you’re not a company. Also, you must take responsibility for everything that happens in your individual, partnership or sole trader business.
When you choose your business structure you must consider tax rates
Tax rates differ significantly, depending on how you structure your business. If it’s a company, you will have a flat rate.
But your tax rate when you’re an individual or going through a partnership is based on individual tax rates. Eventually, you will be paying over 50% tax.
If you structure your business as a partnership or as an individual, your ability to do things with that income is reduced over the years. Hence, you end up paying a lot more taxes up front as your business grows.
Different business structures equal to different levels of asset protection
Now, there are some other things that you’ve probably heard about, such as asset protection. Can you be sued? Can you lose your home?
Well, when you are an individual, a sole trader or in a partnership, it does open you up to a lot more liability than if you’re doing it as a company.
Everything that your partner does, regardless of whether you’ve said they could do it, still represents you in a partnership.
So, you can be liable for things that your partner in business is actually doing. You haven’t done anything and maybe you’re not even aware of what has been done but it’s how the structure works.
As a sole trader or individual, you are 100% responsible for everything that happens in your business.
How different business structures can protect you
Let’s say that your personal car is being used for business purposes and you forget to pay the CTP on that or you forget to pay any other insurance, or someone trips over your front door when they walk into your house.
Without insurance, as a sole trader, you are 100% responsible. So, you can lose your house and you can lose your other assets.
When it comes to your business, we all would love to get that phone call, with a major American multinational saying: “Hey, we’ll give you $100,000 for your brand”. Because you’ve got something they want. However, with branding, trademarks, web pages, it all comes in a high rank.
If you just have a business name, you can go and register that. I could say, “Andrew’s Accounting Practice”. But if I want more legal protection I’d go and register a company.
In this case, a company would give me more protection than just “Andrew’s Accounting Practice”. It would give me more security in terms of my life and my branding.
I could think about registering a trademark as well. The good thing about trademarks is that it doesn’t matter if you’re a company or an individual,t will still increase your protection.
Final advice from Andrew Jeffers
All I’m saying to you today is that you have to think about protecting your brand and protecting your business name.
To do that, you should think about the business structure that best suits your personal and business needs in order to protect your future.
Furthermore, you should also consider tax rates at short and long-term. After all, when you choose your business structure, you are basically establishing the tax rates for the years to come.
Different business structures can influence your tax rates and your asset protection. So, don’t choose blindly, don’t make a rushed decision.
Create a case study and understand all the possible scenarios that can come from each business structure. Then, you’re ready to move forward.
Take your time, get professional advice and make an assertive choice, otherwise you might be compromising your business before it has even started.