BUSINESS STRUCTURES

WHAT STRUCTURE IS BEST FOR YOUR BUSINESS?

STRUCTURES? Sole Trader Partnership Company Trust Unit Trust

SOLE TRADER? A Sole Trader is a person in business on their own. The individual who operates the business takes on all rights and liabilities associated with the business. All of the property and business assets are owned by the sole trader.

SOLE TRADER? Advantages: Keeps it simple No complex legal arrangements No establishment costs and minimal costs for upkeep of the business Not required to consult anyone in making business decisions Minimum legal disclosure = more privacy

SOLE TRADER? Disadvantages: Liable for all the obligations of the business and in the event that the business is not able to meet its debts the sole trader must cover the shortfall from own funds Only way to raise capital is by borrowing As the owner is the business it can be difficult to sell Individual tax rate is higher than a company tax rate

PARTNERSHIP? A partnership is not an entity in its own right. It is merely a form of shared ownership of property and an agreement to share certain benefits and obligations. A partnership is defined as the relationship between persons carrying on business in common with a view to a profit.

PARTNERSHIP? Advantages: Less costly to establish than a company or trust Inexpensive to run Easy to understand Can provide some flexibility in the partners agreement Income splitting between partners Disadvantages: Partners are jointly and severally liable Generally no asset protection Some tax disadvantages

COMPANY? A company is seen by the law as being a legal entity separate to its shareholders. Like any individual person, a company can own property and can sue and be sued. Companies are more regulated than other structures. Proprietary companies only require one director and one shareholder.

COMPANY? Advantages: Taxed at the company rate of 30% Retain profit Separate legal entity Can own property in its name Shareholders are generally only liable for the value of their shares Tax minimisation schemes Owned and operated by only one shareholder and director Buy and sell shares without touching underlying assets Only one director needed if a Pty Ltd company

COMPANY? Disadvantages: Complicated and expensive to set-up Hard to sell shares to non-shareholders Minority shareholders have little or no input Can only leave the shares (not the assets) in the company to your beneficiaries under your will

FAMILY TRUST? Trusts are generally better than companies. It is hard to get money out of a company. Employees have to be truly employees. You can’t just pay your spouse a salary of $150,000.00 if they are not working in the business. Trusts allow you to distribute to more people. Most importantly, you can sell assets out of a trust and possibly get the tax rate down to 12% (or zero). You can also use the small business CGT concessions.

Family Trust? Advantages: Limited liability Trading results are confidential Split income Protection for bankrupt beneficiaries Ability to distinguish between income and capital beneficiaries The streaming provisions Franking credits Attribution relating to distributing capital gains to beneficiaries

FAMILY TRUST? Disadvantages: Cannot distribute capital or revenue losses to its beneficiaries Beneficiaries cannot offset losses against any other assessable income such as salary, interest, dividends etc. Cannot retain income if you do it is taxed at 48.5% Only last for 80 years Not really useful outside the family unit Not as good as a Testamentary Discretionary Trust

WHAT IS A UNIT TRUST? A unit trust is a trust in which the trust property is divided into a number of defined shares called units. The beneficiaries subscribe for the units in much the same way as shareholders in a company subscribe for shares. In an ordinary unit trust, a beneficiary is entitled to the income and capital of the trust in proportion to the number of units held. A unit in a unit trust is really just a means of describing the share in the trust fund to which the unitholder is entitled.

Unit Trust? Advantages: The main advantage of the unit trust over other types of trusts is that the parties involved are issued with units which (like shares): Define that party’s interest in the assets and income of the trust Can be easily transferred Can be re-acquired by the trustee

Unit Trust? Disadvantages: As the units themselves are an asset, a unit trust does not offer the same sort of asset protection as a discretionary trust does. If a person is made bankrupt, then the person’s units will be treated like any other asset and sold to raise funds to pay their creditors. Another disadvantage of a unit trust is that tax-free distributions cannot be made as easily from a unit trust as from a discretionary trust. Also the flexibility and the advantage of being able to distribute on a discretionary basis is not usually present.

CONTACT DETAILS Patrick Sutton Email: psutton@mackeywales.com.au Phone: (07) 4772 6699 Fax: (07) 4721 1649 Website: www.mackeywales.com.au