Home – New Forums Starting your journey Sole trader or family partnership?

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  • #982115
    harvcam
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    • Total posts: 19
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    For the past year I have been planning and working on launching an online shop selling handmade handbags and other accessories. It’s taken this long as I am currently employed full time and have been spending what spare time I have creating products. Plus the financial situation would not allow for me to quit my job just yet and I rather quite like my job as I am still learning a lot in regards to business management.

    The company I work for has been actively off shoring functions to one of our Asia offices over the past few years. I have managed to avoid the cut so far and have moved into a somewhat more secure role within the organisation. The idea of setting up a business on the side was two fold – a) a way for me to express my creativity and b) to have something to fall back on and expand if I were to be retrenched. My vision was that the redundancy payment (or any windfall we may come across) would wipe out our outstanding debt and we could cover the mortgage and living expenses from husband’s wage, leaving me to explore opportunities with my business.

    Cut to Dec 2012 – husband’s position has been made redundant and I’m now the sole income earner. Husband is in his early 50’s, was employed by the one organisation for 26 years in an admin/customer service role and learnt everything ‘on the job’. So there are some hurdles as he is probably considered ‘unemployable’ and subject to age discrimination.

    A few days ago he said to me quite seriously, I could always sew bags for you. At first I thought yeah sure rather half-heartedly but the more I think about this, the more I think it’s not such a stupid idea…..

    My intention was to set up as a sole trader. If I were to do that, would my husband be considered an employee and would I have to pay him a wage even though any money I draw from the business would be going towards our joint living expenses? Can I give him an allowance from my regular income for personal use instead of a wage for any work he does with the business?

    Would it be better to become a family partnership? From what I understand of a partnership the earnings would be split between the two of us which means from a tax perspective we would be paying the same tax rate as if I were a sole trader declaring 100% of the earnings. (I think!)

    Any suggestions on what would work best? Is the answer clear cut one way or the other, or do other potential legal issues come into play?

    #1135047
    Healthy Personal Finances
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    Hi,
    A partnership and sole trader is different for tax purposes. A partership expects all partners are equal (unless you have a partnership agreement stating otherwise).
    If the partnership has $100 profit – it would be split $50,000 to hubby and $50,000 to yourself. Tax on $50k would be approx $7796.
    Whereas tax on $100k would be $24947.
    So you would pay alot more tax doing it as a sole trader.
    I have only covered one point here – but feel free to email us if you want some more clarification.
    Cheers
    Stacey

    #1135048
    al.giffard
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    Hi there,

    Getting your structure right is one of the most important considerations in starting and running a business.

    To answer your questions on paying your husband a wage from the business, this depends on whether he’s technically your employee. He may well agree to just hep you out, as spouses do from time to time, instead of actually becoming your employee. In that case, if he in fact wasn’t an employee, you wouldn’t have to pay a wage.

    In your situation, there would definitely be a benefit in considering your business structure. Different structures offer different benefits, and one that gives you some flexibility with determining who earns the profits of the business might be particularly valuable to you. A sole trader lowers your costs in the establishment phase, but it’s also inflexible in this respect.

    A partnership gives you scope to choose your respective interests in the business at the outset, but I’d suggest you also consider a discretionary trust, which is much more flexible, is also flexible for the future of your business and offers asset protection. A company is also worth considering.

    To highlight the tax benefit alone, assuming your salary is $60,000 and the business profit is $40,000, and assuming your husband had no other income, having the $40,000 in his name instead of yours will reduce your combined income tax bill by $9,353. That’s using 2013 rates.

    Of course, it all depends on your circumstances – which I don’t know, so I haven’t considered – and what you hope and expect of the business. I’m more trying to highlight the importance and value of getting it right at the start. I’d strongly suggest you get advice specific to your circumstances.

    Hope that helps,

    Al

    Disclaimer: As always, this is all just general information. I haven’t fully considered your circumstances so I can’t offer this as professional advice.

    #1135049
    AdvanTax Group
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    Hi there

    I second the pp in that it may be worth considering a disc. trust, there can be flexibility with the distributions (and provision to distribute little bits here and there to any grandchildren etc) as well as better asset protection.

    They cost more to administer and to have the tax prepared for, but can be worth it if they are utilised correctly.

    Regards,

    #1135050
    AngelaGirl
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    Hi There

    I can’t answer your question but I highly recommend you get yourself a good tax accountant and get them involved right from the beginning. They’ll be able to look at your specific situation and give the pros and cons of each structure to help you decide what’s best for you… so not only will it cover where you get the best tax breaks, but also things like set up/ongoing costs as well as personal liability.

    We’re going through the similar startup process with my husband’s business and we’d figured he’d operate as a sole trader. After meeting with our accountant we realised a trust was a far better structure for us.

    Good luck!

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