Business Entities whats right for you
Sole Trader
What is a Sole Trader?
An individual operating a business (typically a registered business name), with unlimited liability.What are the Benefits and Problems of being a Sole Trader?
The Benefits are;– you have total control over the business and its direction
– your structure doesn’t necessarily affect exemptions and discounts for Land Tax and Capital Gains Tax and losses can be offset against profits
– you can move capital in and out of the business at will
– minimal set up and running costs
– no compulsory superannuation or Workers Compensation
The Problems are;
– your liability for anything that can go wrong is unlimited, subject to insurance,
– no asset protection
– you can’t split income between family members
– you must substantiate all deductions
Contact us for more advice and to review your present business structure and documents
Partnership
What does a Partnership mean?
More than one person operating a business and sharing the profits (or losses) in accordance with either their Partnership Agreement, or the Partnership Act.
What are the Benefits and Problems of being in Partnership?
The Benefits are;
- the partners (subject to agreement) have total control over the business and its direction
- your structure doesn’t necessarily affect exemptions and discounts for Land Tax and Capital Gains Tax and can vary losses and profits to the partners year to year, subject to partners agreement
- you can move capital in and out of the business at will, subject to Partners agreeing
- no compulsory superannuation or Workers Compensation for partners
The Problems are;
- your liability for anything that can go wrong is unlimited, subject to insurance,
- no asset protection and liable for the acts of your partner/s
- you can’t split income between family members
- you must account for the business as separate tax entity
- Set up and ongoing costs can be significant
Contact us for more advice and to review your present business structure and documents.
Company
What defines a Company as an entity?
A company is a separate legal entity, comprising Directors (decision makers for the company business) and Shareholders (the owners of the business). Directors are subject to many ASIC_Small Company obligations to honestly and effectively manage the company’s affairs for the benefit of the Shareholders. Shareholders are limited in their exposure to the company’s trading up to the value of their shareholding.
A Shareholder Deed between owners is vital to regulate their share dealings between each other.
The company trades in its own right and is capable of suing, and being sued, in its corporate capacity.
Directors may also be liable for the debts of the company, if for example, it was trading whilst insolvent.
What are the Benefits and Problems of using a corporate structure?
The Benefits are;
– Shareholders liability is limited to the value of their shareholding in the company
– Can be sole director/shareholder arrangement, or up to 50 shareholders (20 for informal investment vehicle)
– tax on earnings is at a flat rate (currently 30% and 27.5% for small business)
– Limited income splitting through shareholdings and dividends
– minimal set up costs, but operating and accounting costs can be high because of compliance requirements
The Problems are;
– you are bound by the company’s constitution
– Directors liability for insolvent trading is unlimited, subject to insurance,
– you are subject to the Superannuation levy, Workers Compensation premiums and Payroll Tax,
– there are restrictions on internal loans and losses are trapped in the company,
– you can sell your shareholding independently of other owners, subject to a Shareholder Deed
Contact us for more advice and to review your present business structure and documents.
Trust
What is a Trust?
A Trust is a tax entity that essentially is a documented asset holding that is owned by a Trustee (either a company, or individual/s) for the benefit of the Trust’s beneficiaries. It is an excellent vehicle to protect the underlying assets in the Trust from creditors or claimants.
The Trust Deed (Fixed Trust, Unit Trust, Discretionary Trust and Hybrid Trust) sets out the various parties to the Trust (Trustee/s, Settlor, Appointee/s, and Beneficiaries) and how the Trustee is to operate the Trust (via specific “Powers”).
What are the different kinds of Trust? and, what are they used for?
Fixed Trust – the trustee holds an asset on behalf of another. For example, a parent opens a bank account for their child. The Funds are the Trust assets, the Parent is the Trustee and the Child is the Beneficiary. Another example is where, say, Parents gift an adult child a house, on the condition they hold a half share in the house – the Trust assets – for their sibling. The Parent would be the Settlor establishing the Trust, the child would be the Trustee being the registered proprietor of the half share of the house – a “legal” interest, but only on behalf of the beneficiary, being the sibling, who owns the equitable interest. In both cases the interest of the beneficiary is “fixed” – whatever is in the bank account, or the half share in the house, even though the value may vary.
Unit Trust – the trustee holds assets on behalf of the beneficiaries in fixed proportions. The income earned from the Trust activities is distributed each year in the proportions of the beneficiaries’ ownership of their unit holdings. For example; two companies join forces to better their competitive prospects for a property development investment. They set up a New Co. (the Trustee) to manage the investment (the Trust Property) for each of them (the Beneficiaries). Company 1 (the owner of the land) puts in 70% of the capital funds, through its ownership of the property, the other Company 2 (the developer/builder) puts in 30% of the capital funds, through the building construction. Once the property investment is on sold, Company 1 is entitled to 70% of the proceeds from New Co (the Trustee) based on its Unit Holding in the Trust and Company 2 is entitled to 30% of the proceeds based on their Unit Holding.
Discretionary Trust – the trustee holds assets for an unlimited class of beneficiaries. The annual distribution is not dictated by a beneficiaries share in the transaction. Typically, discretionary trusts are family trusts. The class of beneficiaries are comprised parents, spouses, siblings, children of a primary beneficiary, usually the Appointor (the person that has the right to change trustees – a very important right) and any associated companies, etc. As you can imagine the list becomes endless, so that there is no particular distribution pattern or percentage that can be imposed on the beneficiaries. The Trustee has the absolute “discretion” to distribute the trust income to any of the beneficiaries. This is excellent for income splitting purposes.
Hybrid Trust – Is a combination between a Unit Trust and a Discretionary Trust. It allows for mixing the best aspects of each type of Trust to use in circumstances not solely related to Family type transactions, while retaining the discretionary nature of the distribution for tax and asset protection purposes.
What are the Benefits and Problems of using Trusts?
The Benefits are;
– you choose the structure that suits your needs, whether family, or business.
– Trusts can be established for passive investment purposes, or active trading purposes,
– Different Trusts can be established for different investments, or projects,
– Trusts maintain the 50% CGT concession and small business concessions available,
– Assets are protected from unsecured creditors (and family members!)
The Problems are;
– The set up costs and ongoing compliance and accounting costs are quite high,
– Losses are trapped in the Trust
– The Trust Deed usually governs transactions and in a business unit trust set up needs to be carefully considered
– maintaining the separation between trust assets and the assets of the Trustee, particularly if not incorporated.
Contact us for more advice and to review your present business structure and documents.
Joint Venture
What is a Joint Venture?
A Joint venture is very similar to a Partnership, and often actually is. Most Joint Venturers don’t want to be seen as Partners, governed by the Partnership Act, and prefer the rights and responsibilities of each of the parties to be set out in contractual form.
In essence, it can be likened to contractors coming together to build a house, without a head builder arranging for that to happen. The head builder is replaced by the parties’ own motivations and directions as contained in the Joint Venture agreement to get the house built.
When is a Joint Venture an appropriate entity to use?
Joint Ventures are appropriate when each of the parties has something to bring to the table to achieve the outcome they want, usually on a transactional basis (one-off) as opposed to an ongoing relationship.
What differentiates a Joint venture from a Partnership?
Partnerships are more for ongoing business relationships and Joint Ventures are usually for Projects. Joint Venturer’s liability is typically limited to their contributions, rather than their future actions, unlike Partnerships.
What are the Advantages and Disadvantages of entering into a Joint Venture?
Joint Ventures are an excellent way to raise private equity capital for a project and to determine how profits (or losses) and contributions to the project are going to be apportioned between the Venturers.
Set up costs for a Joint Venture can be quite high depending on the project and the parties needs.
Contact us for more advice and to review your present situation.