Business Structures

BUSINESS STRUCTURES

There are numerous different business structures available for business, each with their own pro’s and con’s and suitability depending upon the type of business.  There is rarely ever one perfect option that will exactly meet the requirements, however the requirements of the client can often be met by the establishment of a structure, and then ancillary agreements, such as shareholders agreements or partnership agreements.  There can also be any number of combinations of the various structures (ie a company with a discretionary trust shareholder).  The following is a brief guide to the types of structures available to clients and is very general in its information. Contact BNT Legal for a further in depth discussion of your requirements and of the appropriate structure.

Partnership

A partnership is not an entity and is the simplest form of business structure.  It is when 2 or more people carry on a business with a view to profit, however there are numerous other factors to look at when establishing whether you’re in a partnership or not.

Advantages are:-

  • Simple, cost effective (free if partners are individuals) establishment costs;
  • Inexpensive ongoing operating costs;
  • Easy to establish and understand operation wise;
  • Income split between partners;
  • Partnership agreement provides flexibility for operations;

Disadvantages are:

  • Partners are jointly and severally liable (so you are also liable for your partners’ share of debts or at worst, the entire partnerships debts);
  • No asset protection so personal assets are exposed;
  • Some taxation disadvantages / benefits of other structures not afforded.

Partnership of trusts

Slightly different to a partnership in that instead of individuals as the partners, the individuals discretionary trusts are the partners and the individuals are jointly (or a company with each individual as director) acts as the trustee for the trusts.

Advantages are:-

  • Asset protection of the individuals, as its usually only the assets of the discretionary trust that are exposed;
  • Although the interest in the partnership is fixed, the discretionary trust provides the flexibility of distributions to beneficiaries of the discretionary trust;
  • Access to CGT concessions and discounts and tax-free thresholds of other beneficiaries;
  • The individuals can be employees of the partnership, but a partnership of individuals cannot employ the individual partners themselves.

Disadvantages are:

  • Complex structure and more expensive to set-up and operate and more complex succession and governing documents (partnership agreement).

Joint venture

A joint venture is different to a partnership because instead of jointly and several liability and equal income split, a joint venture income and deductions are treated separately and independently of the other parties to the joint venture.  A joint venture can be incorporated or un-incorporated.

Company

A company is a legal entity in its own right, governed by the Corporations Act and the company’s constitution.  A company is therefore required to be registered under the Corporations Act and with ASIC.  The liability of the shareholders of the company are limited to the paid up capital in the shares in the Company.  A company is operated by the directors.

Advantages are:-

  • Asset protection of the individuals;
  • 30% tax rate of company income.

Disadvantages are:

  • Complex structure to operate due to directors duties and rules for operating a company and more expensive to set-up and ongoing costs (ASIC registration fees and ongoing fees, accounting fees);
  • More complex succession and governing documents (constitution/shareholder agreement);
  • Complex tax rules (Division 7A) and some CGT concessions unavailable or concessions harder to access.

Unit Trust

A unit trust is a trust whereby the unit holder subscribes for units in the trust.  The portion of units held in proportion to the total number of units of the trust is the proportion of income or capital you will receive.

Advantages are:-

  • Less regulation that a company;
  • Access to taxation concessions;
  • Asset protection;
  • Fixed proportion of income and capital per the subscribers unit holder’s entitlement;
  • Easy transfer of units.

Disadvantages are:

  • Not the same flexibility to unit holders (unless unit holder is a discretionary trust) as a discretionary trust;
  • Some CGT concessions more difficult to access.

Discretionary Trust

A discretionary trust is a trust where the trustee holds the assets upon trust for the beneficiaries upon the terms and conditions of the trust deed. The trustee can be an individual or a corporation.  Whilst not a separate legal entity it is required to file a tax rreturn

Advantages are:-

  • Less regulation that a company;
  • Access to taxation concessions;
  • Asset protection – depending upon the trustee;
  • Flexibility regarding income and capital distribution between beneficiaries and addition of beneficiaries to the trust;
  • Flexibility of terms within the trust deed to suit specific details of the client.

Disadvantages are:

  • Must have a fixed vesting day of no more than 80 years;
  • Complex structure and more expensive to set-up and operate, ongoing accountancy fees and more complex succession and governing documents.

Self Managed Superannuation Fund (SMSF)

A SMSF must provide for the members retirements.  There are specific rules with respect to investments and operating a SMSF and the set up of a SMSF that must be adhered to, otherwise the SMSF will be non-compliant.

Advantages are:-

  • Asset protection and isolation;
  • Taxation benefits.

Disadvantages are:

  • Strict governing rules regarding investment and management;
  • Benefits not accessible until member attains at least 55.

Succession Planning

Each of these structures require slightly different and personalised succession planning.  Succession planning of the business entities is as important as personal succession planning.  BNT Legal can assist is drafting partnership agreement, shareholder agreements, unit holder agreements and succession documents for trusts and SMSF.

BNT Legal

It is important to note that there are always exceptions and variations to the above structures and the rules of the Bankruptcy Act 1966 are wide reaching and every client’s situation is different.  BNT Legal are happy to help with all facets and establishment of business structures in conjunction with your accountant or any other business structure queries you may have.  It is also important to consider documents within these structures (partnership agreement, shareholders agreement etc) to ensure smooth sailing of the business structure.  Contact BNT Legal today.

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