IN THE KNOW —
To Corporatise, or not to Corporatise? That is the question... What structures are available to builders that can balance tax efficiencies, offer flexibility for businesses, and ease of compliance?
There are four main structures that are available; Sole Trader, Partnerships, Companies, and Trading Trusts. Each structure has positives and negatives, and it is the balancing of these competing factors that work out what the best structure should be for you. Members who are also Licensed Building Practitioners (LBP) have the additional complication that the structure is “looked” at through to the individual license holder. If this is you, you may need to discuss this further with your advisor to determine a way of undertaking additional asset protection structures with trusts and spouses.
The business risk to a sole trader is that they are liable for all business debts as there is no separation between the individual and the business. Sole Traders A Sole Trader is the simplest structure and easy to set up because when you are born, you are automatically given an IRD number, which is all you need.
From a compliance point of view, all income after expenses are deducted and treated as being taxed in the sole traders’ hands, however this does not always give you the most tax efficient outcome. For example, you are not able to employ your spouse without the IRD’s approval and the deductibility of some expenses are limited. On the counter side, it is very easy to wind up a sole trader as you can make an election with IRD to cease operating. The business risk to a sole trader is that they are liable for all business debts as there is no separation between the individual and the business. Therefore, all personal assets belonging to the sole trader could be exposed to creditor risk.
Partnerships If two friends decide they want to work together they can form a Partnership. The partnership is separate from the two individual partners, so the nature of expenditure in a partnership is directly related to the business and any personal expense is “charged” to the partners current accounts. Partnerships also have an additional level of complexity for compliance as they are required to complete tax returns, and then any profit (or loss) is attributed to the individual partners. If partners enter
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