Establishing a trade business involves more than just technical skills and client management; it requires a solid business structure that supports growth, compliance, and financial health. Whether you’re a plumber, electrician, carpenter, or any other type of tradie, starting your own business and choosing the right business structure is crucial.
This blog will provide insights into the best practices for tradies business structuring, offering guidance to help you make informed decisions.
Why Business Structure Matters
The structure of your business as a business owner affects various aspects, including:
- Legal Liability: Determines the extent to which you are personally liable for business debts and obligations.
- Taxation: Influences how your business income is taxed.
- Compliance: Affects the regulatory requirements and reporting obligations.
- Funding: Impacts your ability to raise capital.
- Growth: Determines how easily you can expand or scale your business.
- Succession Planning: Influences the transfer of ownership or management.
Common Tradies Business Structuring
1. Sole Trader
A sole trader structure is the simplest and most common business structure for tradies. It involves one person who owns and runs the business.
Advantages:
- Easy to Set Up: Minimal regulatory requirements and lower setup costs.
- Control: Full control over business decisions and operations.
- Tax Simplicity: Income is taxed at the individual’s marginal tax rate.
Disadvantages:
- Unlimited Liability: Personal assets are at risk if the business incurs debts.
- Limited Growth Potential: Harder to raise capital and scale the business.
- Succession Issues: Business continuity may be difficult in case of the owner’s incapacity or death.
2. Partnership
A partnership involves two or more people who share ownership of the business.
Advantages:
- Shared Responsibility: Workload and decision-making are shared among partners.
- Combined Resources: Pooling of skills, knowledge, and capital.
- Tax Benefits: Profits and losses are distributed among partners and taxed at their individual rates.
Disadvantages:
- Joint Liability: Each partner is liable for the debts and obligations of the business.
- Potential Conflicts: Disagreements among partners can affect business operations.
- Succession Planning: Complicated transfer of ownership in case of a partner’s exit or death.
3. Company
A company is a separate legal entity, distinct from its owners (shareholders).
Advantages:
- Limited Liability: Shareholders’ personal assets are protected from business debts.
- Tax Benefits: Potential tax advantages, such as lower corporate tax rates.
- Growth Potential: Easier to raise capital through the sale of shares.
- Team Management: Technological solutions for team management can enhance efficiency by tracking jobs, managing workflows, and integrating with accounting software for seamless sales management and payroll processing.
Disadvantages:
- Complex Setup: More regulatory requirements and higher setup costs.
- Reporting Obligations: Strict compliance and reporting requirements.
- Management Complexity: Separation of ownership and management can lead to conflicts.
4. Trust
A trust is a structure where a trustee manages the business on behalf of beneficiaries.
Advantages:
- Asset Protection: Assets are held in trust, providing a level of protection.
- Tax Flexibility: Income can be distributed to beneficiaries in a tax-efficient manner.
- Estate Planning: Facilitates the transfer of assets and business continuity.
Disadvantages:
- Complexity: Setting up and managing a trust involves legal and administrative complexity.
- Cost: Higher costs associated with setup and ongoing management.
- Regulatory Scrutiny: Trusts may be subject to strict regulatory scrutiny and compliance.
Best Practices for Structuring Your Trade Business
1. Assess Your Business Needs
Evaluate your current and future business needs, including the specific challenges faced by trade businesses such as licensing requirements, risk management, cash flow forecasting, liability protection, tax implications, funding requirements, and growth potential.
Consider how each business structure aligns with these needs.
2. Seek Professional Advice
Consult with legal, accounting, and business advisory professionals to understand the implications of each business structure. Professional advice can help you make an informed decision and avoid potential pitfalls.
3. Consider Tax Implications
Each business structure has different tax implications. Work with an accountant to understand how your choice will affect your tax obligations and explore ways to optimise your tax position.
4. Evaluate Liability Risks
Consider the level of personal liability you are willing to accept. If your trade business involves significant risk (e.g., working with hazardous materials or environments), a structure that limits personal liability (e.g., company or trust) may be more suitable.
5. Plan for Growth
Choose a structure that supports your small business growth plans. If you anticipate significant expansion, a company structure may offer more flexibility and easier access to capital.
6. Address Succession Planning
Think about the long-term future of your business. A structure that facilitates succession planning (e.g., trust or company) can ensure business continuity in the event of retirement, incapacity, or death.
7. Comply with Regulatory Requirements
Ensure your chosen business structure complies with all relevant legal and regulatory requirements. This includes registration, licensing, reporting, and ongoing compliance obligations.
Conclusion
Choosing the right business structure is a critical decision for tradies. It affects your legal liability, taxation, compliance requirements, and growth potential. By assessing your business needs, seeking professional advice, and considering the implications of each structure, you can select the best option to support your trade business’s success and sustainability.
Contact Grey Space Advisory for business coaching or advisory.
Frequently Asked Questions (FAQs)
1. What is the simplest business structure for a tradie starting out?
The simplest business structure for a tradie starting out is a sole trader, which remains prevalent among tradies, with 63% operating as sole traders in 2023. It involves minimal regulatory requirements and lower setup costs, making it an ideal choice for those new to running a business.
2. How does a company structure protect my personal assets?
A company is a separate legal entity, which means that shareholders’ personal assets are protected from business debts and liabilities. This limited liability protection is one of the key advantages of a company structure.
3. Can I change my business structure later on?
Yes, you can change your business structure as your business grows and evolves. However, changing structures can involve legal, tax, and administrative complexities, so it’s important to seek professional advice before making any changes.
4. What are the tax benefits of operating as a trust?
Operating as a trust allows for flexible income distribution to beneficiaries, which can be tax-efficient. Trusts can also provide asset protection and estate planning benefits. Consult with a tax professional to understand the specific benefits of your situation.
5. What should I consider when choosing between a partnership and a company?
When choosing the right structure for your tradie business, consider factors such as liability, tax implications, regulatory requirements, and growth potential. Partnerships offer shared responsibility and simpler tax treatment, while companies provide limited liability and easier access to capital for growth.
6. Is professional advice necessary when choosing a business structure?
Yes, professional advice is highly recommended when choosing a business structure. Legal, accounting, and business advisory professionals can help you understand the implications of each option and guide you in making the best decision for your business.
