Which business structure is best to protect against being sued?

When it comes to choosing the right structure to own and operate a business there are many things other than income tax to consider. The fact is the simpler and less complicated a structure is, the less tax efficient and protective it is. When a structure is more complicated, it will inevitably be more tax efficient and offer the owners greater protection.

Examples of this are operating as a sole trader, which is the simplest business structure that can be used, as compared to operating as a family discretionary trust with a corporate trustee.

When a business is in start-up phase, the owner is earning income from other sources, and the turnover of the business exceeds $20,000 a year, the operating losses of the business can be claimed as a deduction against the other income earned by the owner.

This benefit is lost once the business becomes extremely profitable as tax will be paid on the profit at the relevant marginal tax rates of the owner, and in the event of the business being sued, the personal assets of the owner can be attacked.

When a business is operated through a family trust, the losses in start-up phase are carried forward to be offset against future profits. Once the business becomes profitable, the income can be distributed among the family to reduce the marginal rate at which tax is paid, and in the event of the business being sued the personal assets of the owner are not at risk. Read more