There will come a time in the life-cycle of your business when you may need to reconsider the legal structure under which your business operates.
Such considerations and restructuring can be prompted by new business opportunities for growth and development, or you may wish to take advantage of lower company tax rates, perhaps you want to protect your personal assets from potential legal risks, or you may simply wish to split your income with your partner or other family members.
Whatever the reasons, we’re here to guide you through the main business structures relevant to filmmakers.
Sole Trader
Most professionals in in the media start their careers as either an employee, a contractor, or more commonly, a mixture of both.
As a contractor or a Sole Trader, your ABN is registered under your personal name and your business income and expenditure is included in your individual income tax return, where it is taxed at normal marginal income tax rates.
The main advantages of operating as a Sole Trader are that administrative and compliance costs are low compared to other structures, and you can take advantage of the tax-free threshold and other tax concessions available to individuals, including income averaging (subject to eligibility). For a more detailed explanation on the benefits of income averaging, please see our blog here.
As with any other business, a Sole Trader is required to register for GST if you anticipate invoicing over $75,000 during the financial year. A Sole Trader can also employ staff, pay super, and register a separate business trading name. A Sole Trader must also maintain formal bookkeeping and record keeping compliance. Note that there is no formal requirement to pay yourself super as a Sole Trader, personal super contributions are voluntary.
It is important to note that as a Sole Trader you are personally liable for any debts incurred by the business, this is known as unlimited liability. It is also more difficult to split your income with your partner or other family members.
Partnership
A Partnership is a structure made up of two or more individuals (or other entities) who elect to go into business together, it exists as a separate legal entity with its own Tax File Number and ABN. A Partnership itself doesn’t pay tax, any profit or losses flow through and are taxed in the partners’ tax returns. Members of a partnership are governed by the terms of their partnership agreement and are subject to joint and several liability. This means you could be personally liable for the debts of your partner. For this reason, a Partnership is not a recommended structure for film businesses.
Company
A Company exists as a separate legal entity, owned by its shareholders and controlled by its directors. A Company has the flexibility to expand and grow by adding new shareholders and investors, and its shares can be sold down the track. However, it is worth noting that investors will invest in the future profits of a film rather than be issued shares in a company, so in this way it differs from other industries.
Despite being more expensive to establish and operate, there are several reasons you may look at establishing a company;
- To take advantage of the capped company tax rate (currently 25%)
- To split your income with your partner or other family members
- To mitigate risk (as the owner of a company your liability is limited, meaning your personal assets are protected from any debts or liabilities incurred by the business)
- To access certain government grants and incentives
- To go into business with one or more business partners (a production company can hold your intellectual property rights and manage your projects in development)
- Or you may require a Special Purpose Vehicle to develop or produce a project, or to facilitate a local or international co-production arrangement.
It is important to note that the profits and assets of a company are not generally available for the owner’s private use. Payments to shareholders and directors must be paid out as either formal wages, dividends, or repayments of cash or equity advanced to the company by the owners. Failure to comply with this can result in penalties and additional tax payable by both the company and its owners.
Companies are regulated by ASIC and must comply with the requirements of the Corporations Act. A Company’s director can be personally liable for any breaches of these regulations. Please see our ASIC blog for a rundown of these duties.
If you have any questions or would like to know more about these business structures and how they might apply to your business, book a free consult with us today.
A note on this article
Information provided by Above the Line Accounting on this website is general in nature and does not take into consideration your personal financial situation. It is for educational purposes only and does not constitute formal financial advice.