Are you starting a business or is your existing business growing and becoming more profitable? If so, you might need advice about structures.
There are a number of things you should consider when determining which structure is suitable, including:
- Succession and change in control of the entity
- Limited liability – protection of assets
- Tax considerations including CGT, income tax and land tax
- Flexibility to change as circumstances change
- Costs of setting up and running
Below is a brief explanation of the types of structures available and some of the advantages and disadvantages of each.
Sole proprietor /sole trader
A sole trader owns the business personally. There will be no distinction between the assets and liabilities of the business and your own personal assets. This means that your personal assets, like your home and car, can be used to satisfy any outstanding debts of the business if things go wrong.
However a sole trader is easy to set up and run.
A partnership is not a separate legal entity. This means that all partners are jointly and severally liable to pay the debts of the partnership. If you have a partnership of individuals then your personal assets and your partner’s personal assets will be used to satisfy any outstanding debts of the partnership if things go wrong.
It is possible to have a partnership of trusts or a partnership made up of companies which will have the same benefits as a company or a trust, as outlined below.
A company is a separate legal entity. It can hold assets in its own name and has limited liability. This means that if things go wrong all the assets of the company may be lost but not the assets of the directors or shareholders. However, directors can be personally liable in some situations such as personal negligence, insolvent trading, employee entitlements, PAYG taxation debts and superannuation contributions. If a director provides a personal guarantee then they will also be personally liable
As a company is a separate legal entity and holds assets in its own name succession of a company is relatively straight forward.
A trust is not a separate legal entity like a company. However, the trustee of a trust can be a company. There can be good tax reasons why a trust is the best option. A trustee of a trust operates a business for the benefit of the ‘beneficiaries’ who are usually your family members and associated entities like companies you operate or other trusts you have.
There are different trusts structures, such as a unit trust, a hybrid trust or a discretionary trust. Discretionary Trusts usually contain flexibility to distribute income and capital to any of the beneficiaries. Unit holders in a unit trust have a fixed entitlement to income and capital in proportion to the units held. A hybrid unit trust can have discretionary entitlement to income and capital.
A disadvantage of using a trust is the potential risk of resettlement if there is a change in provisions concerning beneficiaries or certain other major changes to the trust deed. Resettlement can have disastrous CGT consequences.
If you would like to discuss utilising different structures for your business please contact Clare at Oakhill Lawyers.
It is important to work closely with your accountant when starting a business or changing structures of a business. Oakhill Lawyers can work with your existing accountant or recommend an experienced and knowledgeable accountant who we regularly work with.