?? Risky business - Dangers of Sole Traders, Partnerships & ABNs as Business Structures ??

As Accountants, we are seeing people drop out of high-paying employment or jobs, and jumping in and starting their own business.

This is a very exciting time and it's a great way to be absolutely in control of the impact that you make on this world.

However, this big move towards jumping into business is creating another really big problem.

That problem is, many people think "Ah, I can get an ABN or I'm a sole-trader and voila - I'm in business".

But there's so many risks associated with being a Sole Trader.

I've been in business for a number of years and I've been exposed to some of these risks.

  • I've been sued!
  • I've had petty claims from employees or past-employees!
  • I've had people who have been chasing me for various things, for money et cetera, and
  • I've literally had my house on the line.

So when I learnt about these business structure strategies, it just helped me sleep a bit easier at night, and more importantly, helped me reduce my tax..

I don't want to be in business and have to give half my money to the taxman!

What type of business structures are available to start ups?

Well interestingly, there are actually 400 new businesses registered each week.

So what that normally means is registering an ABN.

An ABN can actually be registered to a sole trader, partnerships, trusts or companies.

They are the common business structures.

But the majority of people start up as a sole trader or, with a mate or a friend, as a partnership.

 

 

 

Why do most new businesses start up as a sole trader?

I believe a big thing is cost.   It's very easy (and free!) to go and register an ABN.

There are two big problems though…

What are the risks associated with being an ABN holder, or a sole trader, or a partner in business?

It might cost you nothing to go set up an ABN, but there are two big problems with being a sole trader which can cost you thousands.

Problem No 1:  Paying too much tax.

The first one is you'll give 49% of your profit, potentially up to that amount, to the tax man. That is ridiculous. No-one likes to pay excess tax, and 49% per cent tax is ridiculous.

Problem No 2:  Business Risks affecting Personal Assets.

Second one is there's actually no protection from the risks of your business to your personal assets.

So your family home, the two cars, the shares that you invest into, your investment property, cash in the bank; they're all exposed to the risks of your business.

So my advice.

Sole trader - don't do it!  It’s the most expensive “free” business structure!

Do I need a proper business structure (Trust and / or Company) from day one or can I wait a year?

Business structures are a long-term investment.

So if you don't set up in the right structure from day one, then you're going to have problems down the road.

Let me explain …

  • Day 1 - ABN.
  • Day 365 - Set up Company & Trust = $3,000 plus GST (estimate).
  • Day 366 - Transfer business from ABN to Company and / or Trust.
  • Day 376 - Pay lots of tax :(

You are essentially selling your business to another entity, or another company or a trust. That sale means you've made a gain on what your business is worth.

You're not getting any cash, because you’re selling it to yourself, but you've got to pay two taxes.

  1. Capital Gains Tax
  2. Stamp Duty.

So my advice is -

If you're going to turn over $100,000 or more in the next 12 months, then get a structure in place immediately.

Why are partnerships twice as dangerous as sole traders?

A partnership is always very dangerous unless you trust the person with your life.

What it means to go into a partnership, it's like two sole traders coming together with the aim of making profit and to make money.

So they're both, in effect, liable each other's decisions.

For example ...

Let's say Ben and I go into a partnership together.

It’s a food truck business.

Ben decides "Hey, we need a new stovetop".

Stovetop is going to cost 15 thousand dollars.

So he goes out, he buys it, he signs a contract with the partnership signing the contract.

As his partner I am liable for those payments.

We're both liable.

This means if one day Ben decides to take off to America.

I'm the only one left in Australia, they'll come after me for payment.

And I am left liable.

So it's my house, my car, my little pushbike on the line for a mistake that my partner may have made.

So that's why it's really dangerous to go into business where there's no structure.

I'm not saying don't go into business with someone, just make sure you've got the right structures set up!

How do I separate business risks from personal assets?

Business risks -

  • Suppliers
  • Customers
  • employees
  • Shareholders

Personal Wealth -

  • Cars
  • The Family Home
  • Cash in the Bank
  • Commercial Property
  • Shares
  • Investment property

Note: Your Superannuation is not included as it is protected in it's own way.

Our goal with business structuring is to put a line of protection in the middle to separate business risks from personal assets.  You simply don’t get this protection as a partnership or sole trader.

A final warning if you are a Sole Trader...

A lot of people start business with an ABN as a sole trader.

They postpone changing to a trust or a company until ‘tomorrow.’

And that's mainly because I believe no-one is out there giving the education on what the alternatives are.

So they might leave it, and one day find themselves turning over this 300,000 dollar a year business.

They’re making great money but they are stuck in this structure paying 49 cents in tax.

Yuk!

They need to change, so here are the costs -

  • Structure set up
  • Capital gains tax
  • Stamp duty
  • Set up new bank accounts
  • Update your invoices

So, while it might be cheaper to start off as a sole trader, it’s not worth leaving it very long at all.

In conclusion...

You can be in business, or you can be in risky business.

What's your choice?

I'll take the option where I can sleep at night!

 

Got a burning question about using Business Structures to save tax and create a family vault?  

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