Motivations for Business Structure Choice for Australian Small and Medium Enterprises

Abstract

Knowledge about legal business structures and how to use and combine available structures to the advantage of clients is an important task of a small and medium enterprise (SME) advisor. An SME advisor, when assisting clients choose a business structure at the inception stage of the business, may focus on various substantive elements including tax considerations, limiting personal liability, asset protection, access to equity funding, and compliance costs. The choice of business structure can have significant implications, including how equity can be raised, legal obligations, and how tax is imposed. Currently, there is a gap in Australian literature about the driving motivations for this decision. This gap is addressed by exploring the reasons behind the business structure choices adopted by SMEs, and the desired attributes of such choices. This thesis also examines why SMEs have been using discretionary trusts extensively, and whether discretionary trusts provide certain attributes not offered by other business structures. Using a review of the literature to develop the key research questions, the study in this thesis employed a sequential mixed methods approach. Initially, a qualitative stage of semi-structured, indepth interviews with 10 SME advisors (accountants and lawyers) was conducted, and this formed the basis for the 12 scenarios in Stage Two. The second, and core, stage of the research involved an experimental case study design (12 scenarios) to test the integrity of the reasons provided by advisors. Forty-eight experienced SME advisors (lawyers and accountants) were interviewed and surveyed. Three key findings have emerged from the study. First, the findings from the case studies demonstrate that, overwhelmingly, advisors recommended, for most businesses, a combination of structures for one business operation. It is through this combination that a number of key tax and non-tax attributes are achieved. Second, the data from both the case study and the surveys indicate that discretionary trusts are used to gain tax advantages. Third, the findings ultimately demonstrate that, while discretionary trusts could offer favourable attributes to SMEs, which are not offered by other business structures, a number of issues were identified concerning the use of discretionary trust for business operations. The findings provide strong evidence that tax considerations are an important factor for the chosen business structure. They also demonstrate that advisors perceived that there are factors other than tax which can be considered important attributes for the choice of business structures for SMEs. This knowledge provides information on what characteristics are needed for an ‘effective business structure’. The qualitative and quantitative results are drawn on to recommend tax policy reform to improve the taxation of SMEs in Australia. To address the issue of tax structure biases, and to tackle the issue of income splitting, one of the recommendations is the adoption of the family as a unit of taxation rather than taxing individuals. Furthermore, through this analysis, recommendations are articulated to tackle some of the issues that challenge SME operators. The thesis recommends that Australia’s tax system be reformed to provide greater equity in taxing business income, regardless of the chosen legal structure.