COMMERCIAL LAW

BUSINESS STRUCTURING

Company Structure

An introductory guide to structuring your business for succession and asset protection

Introduction:
Choosing the correct structure for your business

Choosing the correct structure when establishing a business is important – it can be expensive and time-consuming to change once in place.

The following core issues need to be considered:

  • Simplicity, cost of implementation and cost of ongoing administration;
  • Governance and management;
  • Tax;
  • Asset protection;
  • Sale;
  • Succession

It is becoming increasingly rare to find businesses structured as sole proprietorships and partnerships due to personal liability. 

In addition, on the death of a sole proprietor or partner, the business, or partnership share, falls into the estate of the deceased and can trigger tax consequences which may or may not be deferred, or covered by an exemption.

Businesses are more commonly structured as proprietary limited companies or discretionary family trusts, and often a number of these companies and trusts can be used to build a business structure designed to address and deal with many of the core issues listed above.

WARNING: It is important to take professional advice before making any decision relating to your business assets and finances. Information within this Guide is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored business structuring advice and is for guidance only.
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Chapter 1:
Proprietary Limited Company

Definition

A proprietary limited company is a separate legal entity which can own assets, and contract in its own right. Income can be accumulated, or distributed via dividends.

Benefits

  • Simple and inexpensive to establish and administer;
  • Simple to split governance (board directors) and management (employees);
  • Income can be accumulated without penalty, taxed at the company tax rate (27.5% / 30%) and shareholders are entitled to offset tax paid by the company if the income can be distributed as a fully franked dividend;
  • Limited liability for shareholders and directors, subject to directors’ duties and insolvent trading;

  • Shares in the company form part of the estate of the shareholder;

  • Shares are easily transferrable (shareholders can sell their shares without selling the business or assets) and shares confer fixed rights to votes, dividends and capital;

  • Succession is simple through a gift of shares.

Limitations

  • No 50% CGT discount for appreciating assets;
  • Non-assessable amounts from depreciation and write-off must be distributed as unfranked dividends or Division 7A compliant loans;
  • Complications can be caused by Division 7A.
Family Trust

Chapter 2:
Discretionary Family Trust

Definition

Within a discretionary family trust, the Trustee owns trust assets and distributes income and capital at their discretion to potential beneficiaries pursuant to the trust deed.

Benefits

  • Simple and relatively inexpensive to establish and administer. A trust can usually be amended relatively simply, for example to add or remove potential beneficiaries, or to add powers or provisions which may become necessary in circumstances not envisaged at the outset.  Care must be taken however not to create a resettlement;

  • The trust is managed on a day to day basis by the Trustee but is ultimately controlled, or governed, by the Appointor who has the power to remove and replace the Trustee. Corporate Trustees are often used to ensure continuity of asset ownership, which would not occur on death of an individual Trustee, and to limit personal liability in the event that a trust liability is incurred which is not indemnified or covered by trust assets;

  • Income can be distributed and streamed flexibly and tax effectively between potential beneficiaries. Capital gains made by the trust can be reduced by the 50% discount and small business CGT concessions. Discretionary trusts are therefore beneficial for holding land and other assets which are likely to appreciate in value;

  • Assets of the trust do not belong to any beneficiary, and therefore attract an increased level of asset protection;

  • Control of the trust can pass in lifetime, or on death, through a gift of shares in the Corporate Trustee and nomination of a new Appointor.

Limitations

  • The entitlement of a potential beneficiary of the trust is not fixed, compared to the fixed entitlement of a shareholder of a company. A potential beneficiary cannot sell an interest in a discretionary trust, or deal with an Interest by Will on death;

  • All trust income must be distributed or be taxed at the trust rate (47%);

  • It can be difficult to utilise trust losses.

Unit Trust

Chapter 3:
Unit Trust

Definition

A unit trust is a trust where the rights of the beneficiaries (unit holders) to income and capital are fixed based on how many units have been issued to them. Usually unit holders of the unit trust incorporate a (new) company to act as a trustee and nominate various unit holders as directors of the company.

Benefits

  • Asset protection through limited liability;

  • Rights to income and capital can be fixed through ownership of units;

  • Units are simple to transfer;

  • On disposal of any asset of the trust, it is entitled to a 50% discount factor on capital gains, if assets are disposed after one year, this discount flows throw to unit holders’ on distribution;

  • Allows for external investors to be brought in;

  • Can avoid some of the regulation associated with companies.

Limitations

  • Non distributed income is taxed at trust rate (47%);

  • Non assessable amounts from building write-off and depreciation distributed to unit holders are potentially taxed under Capital Gains Tax event E4 which can be a problem if the unit trust is used to hold property;

  • Transfer of units may attract stamp duty;

  • A unit trust structure cannot distribute capital or revenue losses to its beneficiaries, so when a trust incurs a loss beneficiaries are not able to offset that loss against any other assessable income that they may derive from other sources such as salary, interest, dividend etc;

  • As a result, should a trust incur a net loss to its beneficiaries, it may be wise to have debt held at the unit holder level, rather than the trust level, to avoid negative gearing type losses being locked up in the trust.

Hybrid Unit Trust

Chapter 4:
Hybrid Unit Trust

Definition

A Hybrid Trust is a cross between a Discretionary and a Unit Trust, enabling you to split the trust up into units while also having beneficiaries to distribute to at your discretion.

They allow the respective rights and entitlements of unrelated third parties to be respected, and once this is done, between those parties and all related persons (e.g spouses, children, related family trusts and so on).

The income tax, capital gains tax and asset protection attached to hybrid trusts means that they are often the preferred method of structuring a business, especially where more than one un-related party is involved: for example, two separate family groups who are buying a commercial property together.

Benefits

  • With a corporate trustee – limited liability;

  • Provides more flexibility with tax planning;

  • Ability to issue and redeem units with no stamp duty in some States;

  • Income and Capital Gains taxed in the hands of beneficiaries;

  • Benefits / income can be passed to beneficiaries without change in ownership of the investment;

  • Control of investments can effectively be retained by the appointer of the trustee who normally places the asset in the trust;

  • Confidentiality of information as there is no statutory disclosure requirements;

  • No audit requirements – Accounts for Income Tax Return preparation only;

  • Easy entry and exit of owners;

  • Trusts are relatively simple to wind-up.

Limitations

  • Cost of creation and administration of the trust is higher than an Individual or Partnership;

  • Potential changes to legislation – Taxation of Trusts;

  • Careful structuring required for negatively geared investments as Capital and Revenue losses could get quarantined in the Trust;

  • When grossed up dividends are less than net losses from other sources, the refundable franking credit is lost and the carry forward losses are reduced by the amount of franking credit lost;

  • The ATO issued a Tax Determination against these Trusts used for property investment.

Assets

Chapter 5:
Asset Protection Structure

This is an example of a simple business structure commonly used.  Many different combination structures can be used, depending on the particular circumstances and requirements of the business
Company Structure
In this is example:
  • The business assets such as land, machinery, trademarks and stock are owned by a discretionary family trust, with a Corporate Trustee, if appreciation is likely.
  • A separate company is incorporated to trade. If claims arise in the trading company, the business assets are held by another entity and should be quarantined.
  • The discretionary family trust owns the shares in the trading company. The dividends pass to the discretionary family trust, from where they can be distributed effectively at the discretion of the Trustee. If the trust is a hybrid trust, discretionary as to capital, but with units to fix income entitlement, the income will be distributed to the unitholders, whether individuals, or perhaps next generation discretionary family trusts.
  • Succession is simply dealt with by a gift of the shares in the Corporate Trustee and nomination of an Appointor of the discretionary family trust.
  • This structure can often be achieved through the use of Capital Gains Tax rollovers in stages.
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Chapter 6:

How can Ezra Legal help?

Our team of commercial lawyers have years of experience in the area of business structuring, succession planning and asset protection. This means that they know what to look out for when structuring your business to help avoid unnecessary costs and complexity.

They will help you develop a long-term strategy that reduces stress on your business, removes the need for disputes in the future, and provides you with certainty and peace of mind.

Our services include:

  • Creating a clear, legally binding business structure;

  • Making any changes over time; and

  • Making sure your wishes are followed in relation to succession.

We have outstanding experience in commercial acquisitions, acting for buyers and sellers.

Experience Since 2005 Ezra Legal has been providing advice on all areas of commercial law

Expertise We have over 50 years combined experience in the area of business planning and structuring

Reliability We’ll help you weigh-up your options by giving you straight-up, no-nonsense advice

Trust We are honest and reliable, going the extra mile to ensure our clients are 100% satisfied

We help our commercial clients establish incorporations, augmented by appropriate business structures and governance arrangements

Michael Fabbro

Contact Michael Fabbro

Email: mfabbro@ezralegal.com.au
Tel: (08) 8231 6100
Website: Ezra Legal – Services – Commercial Law 

The way Ezra Legal assisted me to organise my business in the best interests of me today, and my sons in the future, showed real foresight, and gave me and my family peace of mind.

David - Company Director
Categories: Commercial, Ebook

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