5 things you should know about...Structuring Your Business
1. Asset protection
Asset protection can take two forms:
• Protection of the assets of the owner; and
• Protection of the assets of the business.
Protection of the assets of the owner
Consider two possibilities:
1. If your business is likely to borrow money from trading partners or financial institutions it is important that it always has enough assets to satisfy these creditors. If there is also the potential for the level of assets to diminish below the level of debt, asset protection becomes an important issue.
2. If the business operates in a field where it is likely to be sued it is important to adequately insure against this possibility. Where insurance is not available or too expensive and the level of assets of the venture is less than the amount of the potential action, asset protection will be an important issue.
In both cases it will be important that a creditor is:
• Limited to attacking the assets of the business, and is
• Not able to pursue the assets of the owners.
For this reason we normally recommend that a company be established which, depending on the circumstances, would be accompanied by a trust.
2. Tax minimisation
Income Tax
Planning to minimise income tax will be an important factor for all businesses.
Income tax minimisation can take the form of ensuring that income derived by a structure is taxed at the lowest possible rate. This can be done by ensuring that:
• Low individual marginal rates and tax-free thresholds are taken advantage of; and
• Other income is taxed at a corporate rate.
For most small and medium businesses this is best achieved by the establishment of a trust with a company as trustee.
Capital gains tax minimisation
If a business will derive income that is capital in nature, it will be advantageous to minimise the capital gains tax liability.
The main way that this is achieved is by structuring the business so that both the CGT 50% discount and the small business concessions can be accessed.
CGT minimisation might also occur by making sure that:
• The business that will make capital gains is conducted through an existing entity with utilisable revenue or capital losses; or
• The business that will make capital losses is conducted through an entity that will have capital gains to offset the losses against.
Capital gains tax can be best minimised by using a trust structure.
3. Ease of Administration
Any structure put in place will result in costs arising. Such costs include (but are not limited to):
• The cost of purchasing an entity;
• The cost of initial registrations;
• The costs of ongoing renewals; and
• The cost of accounting and tax return requirements.
4. Admission of equity participants
Some structures are more suited to the introduction of equity participants than others. At the beginning of a business, consider future opportunities including whether it is expected that equity participants will be introduced.
In structures such as a discretionary trust, it is difficult to introduce an equity participant as there are no fixed entitlements: all distributions are subject to the discretion of the trustee. A unit trust on the other hand readily allows for new participants as does a company.
5. What structures are recommended
The type of structure you establish for your business will depend on your unique circumstances. However, considering the above factors, most often we recommend a Trust with a company acting as trustee. There are two main types of trust structure, a family discretionary trust; and a unit trust. This type of structure will typically provide better asset protection, better opportunities to minimise taxation and, in the case of a unit trust, allow for the introduction of further equity participants. In all cases we suggest you seek advice from your accountant and lawyer.
The above factors determine the type and complexity of structure that will be adopted. In general, the basic structures listed below will suit small, medium and emerging businesses.
• Companies
• Trusts
• Partnerships; and
• Individuals (sole traders)
For more information please contact Tony Carter at AJM Carter on 03 5974 5173 or by email - tony@ajmcarter.com
The information contained in 5 Things you should know about...Structuring your Business is for your general information only and should not be relied upon as specific legal advice. You should consult your lawyer, accountant or other adviser to obtain advice to suit your needs
© David Carter and Tony Carter 2010