Welcome to our Start-Up Series! Today, we’re here to help new entrepreneurs with an important decision: What’s the best business structure for my start-up?

Choosing the right structure is crucial for your success, especially when it comes to taxes. 

The 3 Main Factors in Choosing a Business Structure

When deciding on a business structure, consider these three key points: 

• Asset Protection: Keeps your personal assets safe from business risks.   
• Tax Savings: Helps you lower your tax burden legally.   
• Flexibility: Makes it easier to adapt as your business grows or succession planning.   

While all of these are important, this post focuses on the tax side to make things clear and easy to understand. 

Identifying Your Income Type

The first step in planning your taxes is understanding where your income comes from. There are two main types: 

• Personal Services Income (PSI): This is money earned from your personal skills or work essentially, getting paid for your time and effort. 
• Business Income: This is money earned through a business system that doesn’t depend solely on your personal work or effort. 

How PSI Affects Taxes

If your income falls under Personal Services Income (PSI), the business structure you choose, whether it’s a company, trust, or another setup won’t change how it’s taxed. PSI income is always linked to the individual who earns it, which limits your options for tax savings. 

So, what can you do about it? 

Shifting to Business Income for Better Tax Savings

To save on taxes, transitioning from Personal Services Income (PSI) to Business Income is essential. While it can be a bit challenging, it’s an important step for effective tax planning. It requires careful planning of your business structure and operations. We’ll discuss this process in more detail in a future post. 

Success Story: Mark’s Consulting Business

Let’s explore a real-life example. “Mark” (name changed for privacy), a client, sought advice while starting his consulting business. We started by assessing his business model- how he planned to operate, generate income, handle expenses, and manage potential risks.  We also took a closer look at his personal finances, including assets, liabilities, and family situation, to provide tailored advice. 

In Mark’s case, the risks involved in his business were minimal and could be covered with insurance, so we avoided adding unnecessary complexity or costs. 

To help Mark manage his finances effectively, we set up a Xero account and provided coaching sessions on how to use the software. These sessions gave Mark valuable skills, reduced his costs, and helped him gain better control over his business finances. 

We also scheduled check-ins at 6 and 12 months to review his progress and make any needed adjustments. Mark was thrilled with this detailed, proactive approach, which not only saved him money but also set him up for long-term success as he started his business. 

Conclusion

Choosing the right business structure for your start-up is a crucial step, especially when considering taxes. While this post focused on the tax side of things, it’s also important to consider asset protection and flexibility as part of the bigger picture.