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Andrew Jeffers CEO / June 19, 2017

Why Is It Important To Choose Your Business Structure Wisely?

The structure of your business is one of the most important decisions you will ever make for the success of your business. Why?

It will influence your taxes, your personal liability and your earning potential.

I’ve seen so many people who want to start a business jump straight into setting up a company. Whilst that’s a viable option it’s important to know what other business structures are out there in order to decide which will be the best fit for yours.

Let’s go over your options of choosing a business structure and understand how it can influence your business.

When choosing a business structure…

Take into consideration a number of important factors, like:

  • Taxes
  • Personal liability

People usually start a business through the most common business structures ie

  • a sole trader
  • a partnership
  • a company

Tax rates for different business structures

  • If you’ve structured your business as a company you’ll have a flat tax rate.
  • If you’re an individual or a partnership, your tax rates will be based on your individual tax rates.

The risk with individual tax rates is that whilst it is almost nothing in the beginning it simply keeps going up as your business succeeds. At the top rate, you may be paying over 50% tax.

As your business grows, if you structure it as a partnership or an individual your ability to use your income decreases. This happens because you’ll end up paying way more taxes up front.

You might also be interested in: What Is Cloud Accounting?

Asset protection for Individual, Sole Trader & Partnership vs. Company

What if I get sued? Can I end up losing my house, my family, my assets?

These are good questions to ask yourself before deciding on a business structure.

In such liability cases, asset protection can take care of you.

As an individual, sole trader or partnership you are exposed to a lot more liability than if you were a company.

  • In a partnership, everything your partner does represents you. This means you can be liable for the actions of your business partner.
  • As a sole trader, you’re 100% responsible for everything that happens in your business.

Here’s an example.

Let’s say you use your personal car for business purposes and you forget to pay the CTP on that car. At the end of the day, as a sole trader or a partnership, you’re 100% responsible. You can lose your assets.

It all comes down to your legal protection. If you have a business name you can register that as a basic precaution- but if you want more legal protection, you should register a company.

In terms of branding and the name of your business, you also have the option of registering a trademark. The good thing about trademarks is it doesn’t matter whether you’re a company or an individual, it will give you more protection.

You might also be interested in: Five Essential Things To Understand About Being In Business

In a nutshell…

Spend some time exploring your options when it comes to your business structure. Now that you’ve seen the long-term benefits of choosing the right structure for your business, I hope you have a deeper understanding of its importance.

I can assist you in making the right decisions when it comes to your business. Whether you have questions about accounting software or company set up, I am here to help. Let’s get in touch now.

contact-shuriken-today

Filed Under: Business, Structure Set up Tagged With: Business, structure setup, two minute accountant

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Shuriken is at the forefront of accountancy, providing clients with a broad range of services, coaching and mentoring.

Contact Shuriken if you want to launch or grow a business or if you want to get a clear action plan on how to achieve your financial goals. We can help with benchmarking, cashflow forecasting, payroll and much more.

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