Business Structure 3 – Distribution of Profit or Loss

Exhausted of spending all your time reading endless articles about business requirements, and not really getting what you actually need?

Want to actually understand all the information you require to start and run your business?

Well, you’ve come to the right place!

Welcome to our series of Little Tips where we will cover a range of topics on starting and running your very own business.

The first topic was an Introduction to Business Structure where we will briefly explain the main issues in a simple and readable manner. In each post we will look at each structure from the following points of view:

• Risk
• Profit Distribution
• Taxation
• Opportunity to Raise Capital
• Costs to Run

These tips should only be used as a guideline as there are many implications for each type of business structure which should be discussed with your accountant/lawyer.

We continue the Business Structure series and today we will discuss how different types of business distributing its profit or loss

Sole trader

All profit from your business will go to yourself at the end of the year.

The loss also will go to yourself, but you will need to satisfy one of four tests to be able to claim the loss against your other income (https://www.ato.gov.au/Business/Non-commercial-losses/Four-tests/ )

Partnership

Any profit or loss and at the end of the year will be split either equally or in a proportion to the contributed capital (please remember to specify in your written Partnership Agreement how you are sharing the profit. Do you have to have a written Agreement – no, but to avoid any unpleasant situation, better to write it at the beginning).

If, however, the partner is an individual, you will need to satisfy the tests (same as for Sole traders) to be able to offset this loss against other income.

Trust

All profit at the end of financial year has to be distributed to the nominated beneficiaries. This is the sweet part about the trust – you can distribute profit to any member of your family or associated entity (other trust, company, partnership) and in the proportion you want! Just take care – the nomination of beneficiaries must be done via Resolution by 30 June each year.

If the trust has a loss it will depend on accounting situation, not tax situation. A bit complicated. Please let me know if you need simple explanation of it, so I can write for you a separate post.

Company

Profit from the company can be accumulated or paid to shareholders in form of dividend. No discretion here – you can receive only the proportion of the shares you hold. If you own 100% shares – all dividends can go to yourself only.  If you and your spouse have 1 share each, then the dividend must be distributed 50/50 you yourself and spouse. And so on.

The loss will be accumulated within the company until future income

Stay tuned and subscribe for the next topic in our “Little Tips” series. Up next we discuss the taxation in each business structure.