There are different structures available to not only protect the assets within them but can also lead to tax savings. 

 

My experience being an Australian is around the structures that exist in Australia. However, there should be similar equivalents in most western countries.

The goal here is to give you an overview of the different structures I am familiar with and some language that should help you if you decide to pursue a structure that is right for you. There are more structures available depending on where you are from but I’ll cover three main structures I’ve had experience in.

 

 

In Australia, an individual can register an Australian Business Number (ABN). Although you can be a sole trader without an ABN, having an ABN allows you to legitimise yourself to customers, claim sales tax credits, purchase Australian domain names and so on.

 

Everything you earn through this structure will come under your personal income tax and you’ll pay tax at your assigned tax rate. As a sole trader, you can claim business expenses and get tax deductions where allowed.

This is the most simple of structures that can be good to start with, especially for a side hustle but if you plan on growing it and generating more income, you might find a different structure is needed.

 

 

In Australia, we have discretionary trusts (also known as family trusts). These are great for asset protection as well as tax efficiency.

 

The person that controls the trust (the Trustee, can be more than one) controls and allocates assets as well as the income within the trust. 

The trust will also have one or more Beneficiaries who can benefit directly from the trust.

 

My wife and I have a discretionary trust which holds various investments. We are both the trustees and the beneficiaries of the trust. This means we can control the trust and benefit from the trust. At the end of a fiscal year, we as the trustees need to decide what to do with any income that has made its way into the trust. We can distribute it to ourselves as the beneficiaries or we can distribute it to family members such as parents or siblings. We can even give to our church.

 

The downside to this structure is all income has to be distributed at the end of the fiscal year. So if you make a lot of money, it has to go somewhere and you can end up paying more tax if you start creeping into higher tax brackets.

 

A trust can have what’s called a corporate trustee. What that means is you have to set up a company that is assigned the trustee of the trust. Whoever is the director of the company can then control the trust. The good thing about this is it adds an extra layer of protection.

 

Lastly, you can set up a company. My experience is with Proprietary Limited (Pty Ltd) companies which are the most common types of companies in Australia. Again, these are great for asset protection as well as tax efficiency.

A company will have one or more directors, generally, the owner of the company and are heavily involved.

At the end of the fiscal year, the company will have to pay tax on profit, however, at a fixed company tax rate. In Australia, that's 27.5%.

A company can make distributions to directors of the company, similar to how you might distribute money to a beneficiary of a discretionary trust. The cool thing here is if the company paid tax on any of the money distributed, the recipient director will only have to pay the difference in tax. So if the director's tax rate is 43%, they will only owe 15.5% tax.

There is no one size fits all structure and it’s always important to seek advice from your own accountant before setting one up. You need to look at your personal situation as well as the growth trajectory of your endeavours and goals to ensure you are set up with the correct structure.

When I first set up a proper structure for our software business, we had no idea what we were doing. We went to an accountant and they set us up with a discretionary trust. 

After a couple of years, we had to move to a company because we were making too much money and the company made more sense. We ended up keeping the trust for personal investments so it was not all to waste.

This is an example of how your needs can change and how everyone needs a unique structure to them.

My wife and I now make use of different structures for both personal, investment and businesses that we own so you can have more than one.

-Ben