What Business Structure Should You Choose When Starting Up?

Welcome to our Start-Up Series, where we offer essential guidance for new entrepreneurs. Today, we’re tackling part of a vital question:

“What business structure is best for my start-up? “

Understanding this is key to your venture’s success, particularly from a tax perspective.

The 3 Pillars of Business Structure
When deciding on a business structure, there are 3 Key Pillars to consider:

• Asset Protection: Safeguards your personal assets from business liabilities.

• Tax Minimisation: Helps in reducing Tax burden legally.

• Flexibility: Allows for adaptability as your business grows, or succession planning.

While all are important, we’re zooming in on the tax aspect in this post to keep things simple and digestible.

Understanding Your Income Type

The first step in Tax Strategy is identifying how your income is generated. There are generally two types:

• Personal Services Income (PSI): This is income derived from your personal skills or efforts – essentially, trading time for money.
• Business Income: This is income generated through a business system, not reliant on your personal labour or effort.

Tax Implication

If your income is classified as PSI, your choice of business structure – be it a company, trust, or otherwise – won’t have a significant impact on how the income is taxed. Regardless of the structure, all PSI income will be attributed to the individual generating it. This means, your ability to minimise tax is limited.

SO, what do you do here?

Transitioning to Business Income for Tax Efficiency

To minimise tax, you’ll need to transition from PSI to Business Income. This shift can be complex, but it’s a crucial strategy for tax efficiency. It will involve strategic planning around the structure and operations of your business. We’ll explore this transition in more detail in a future post.

Case Study: Paul’s Consulting Business

Let’s look at a real-life example. “Paul” (name changed for privacy), a client, approached me for advice when starting his consulting business. We first identified exactly how Paul planned to operate his business, how he generated income, anticipated expenses, and the risks involved. We also reviewed his personal assets and liabilities and his family group to provide holistic advice.

In Paul’s case, we found that the potential risks involved in his business were low and most, if not all, could be covered by insurance, eliminating the need for added complexity and unnecessary cost.

We also set up a Xero account for him to assist with managing his finances and provided coaching and training to best utilise the software for his benefits in several sessions. This upskilling helped Paul cut costs and gain a deeper understanding of his business.

We then scheduled meetings at 6 and 12 months to review the business’s progress and discuss any required changes or updates. Paul was extremely pleased with this proactive, detailed approach that saved money, which is crucial when starting up.

Conclusion

Choosing the right business structure for your start-up, especially with tax implications in mind, is a foundational decision. While this post focused on the Tax aspect, remember that Asset Protection and Flexibility are also crucial components of this decision.

Stay tuned for more insights in our upcoming posts, where we’ll dive deeper into transitioning from PSI to business income and explore other key aspects of starting a successful business.