Monday, September 7th, 2009 - MPR
At a crucial time of turnaround for Australia’s economy, many SME owners are unaware of how the right business structure may help during a period of potential growth, says a respected accounting and advisory firm.

Marc Peskett, partner of Melbourne based firm MPR Group, says tax issues, asset protection, and varying commercial issues such as life of the business and borrowing and investment needs, should all form the basis of a decision regarding what kind of business structure an SME should choose.

“With the RBA reporting that the economy is set to grow for the rest of the year, now is the time for current and prospective SME operators to make sure that their choice of business structure is going to allow them to reap the rewards during a period of expected growth for the economy,” he says.

“Whether you are operating, or are looking to operate as a sole trader, a proprietary limited company, a trust or any other kind of structure, knowing the advantages and pitfalls of each will allow you to make the best decision with regard to your business’s future.

“All SME owners should be asking themselves questions regarding how long they perceive they will be holding onto the business for, whether they will employ staff, what markets they will be selling to, whether or not they will restructure in the future, and what investment of additional funds will be needed.

“These will form the basis of an appropriate business structure for their business.”

Mr Peskett says one key area is how business owners should consider their own liability with regards to their own personal wealth.

“Major creditors like banks often require directors to personally guarantee the company’s liabilities and liability can also arise where a director or employee is found to have negligently performed their duties under the Corporations Act,” he says.

“Whilst the different structures offer various levels of protection, it’s important to realise that no structure is entirely safe.

“For example, where a sole trader has unlimited liability, and thus is more exposed, a company offers greater protection as personal assets are separated from the business.”

Mr Peskett also says that SME operators should consider the needs of the business and the risks it could be exposed to during the course of its life.
“For instance a business likely to experience a high level of risk of injury to employees, such as in the construction sector, will need insurances and indemnities that can be more obtainable for a company to take out,” he says.

“Where there are operating risks, consideration should be given to separating the business assets from the business operations.”

Another financial consideration SME owners should make is regarding the varying taxation requirements of different forms of business structures, as they can have a marked effect on the financial efficiency of a business.

“Whilst companies pay tax on net profit at a flat rate of 30 percent, which may be of benefit to businesses with high profit levels, discretionary trusts don’t have to pay tax,” Mr Peskett says.

“Instead the beneficiaries of the trust pay tax on their share of the trust’s net income and the trustee can decide how to distribute income between beneficiaries.

“Additionally, there are different costs associated with establishing each structure, as well as ongoing administrative and compliance costs.”

Mr Peskett says a company is more expensive to establish, generally incurs greater administrative costs and has greater tax reporting requirements to meet, compared to sole traders and partnerships.

“Trusts are also expensive and sometimes complicated to establish. On the other hand, it costs nothing to set up as a sole trader, unless you choose to register a business name which attracts a fee,” he says.

“For the sake of a business’s financial future, owners should strongly consider what kind of structure will be attractive to both customers and potential shareholders and lenders.

“Obtaining additional capital through borrowing or attracting investors is easier in a structure that provides limited liability, such as a company.

“As well as this, banks can have different lending guidelines that could mean sole practitioners and trusts can find it more difficult to obtain additional capital.

“Customers may also have a greater sense of trust when dealing with a company than with hybrid trusts, for example, so it’s best to do some market research here to see what might be appropriate for your business.”

Marc Peskett has over 25 years of experience in high-level business planning, taxation consulting and general accounting.

ENDS

Marc Peskett can be contacted for comment on 03 9869 5900.

For all media enquiries contact Bruce Nelson on 0423 403 449.

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MPR is a Melbourne based accounting firm.
Bruce Nelson
P: 0423 403 449
W: www.mprgroup.com.au/

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A respected accounting and advisory firm says that at a crucial time of turnaround for Australia’s economy, many SME owners are unaware of how the right business structure may help during a period of potential growth.

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