Choosing the Right Business Structure
It is important to start in business with the correct operating structure as any subsequent restructure can be expensive due to income tax, stamp duty and legal costs. The particular structure chosen needs to be appropriate to the owner's specific circumstances and take account of likely events in the future (e.g. children turning 18 years of age or admitting a new partner).
Family trust
Accountants often advise their clients to operate their business in a family trust. This helps in managing assets and liabilities as well as offering flexibility in estate planning.
Family trusts are not directly taxed. Instead beneficiaries of the trust are subject to tax on their share of the trust's net income. If a family trust operates the business there is much more flexibility in that income can be distributed to beneficiaries on lower tax rates and the ability to obtain the full benefit of the small business capital gains tax concessions.
The capital gains tax concessions can mean that no tax is payable on a capital gain arising from the sale of the business in the future. In addition, family trusts, unlike unit trusts and companies, are not subject to provisions that claw back certain tax concessions.
A corporate trustee (rather than an individual) is often used for a trust operating a business so that the personal assets of the owners are protected from any future claims made against the business.
Its important to note that a family trust would not be the appropriate structure to operate a business where partners are likely to be admitted in the future. Instead the business could be run through a unit trust (with a corporate trustee for asset protection) and the units held by a family trust.
Corporate beneficiary of the family trust
If the business is deriving substantial income and all of the individuals are on marginal tax rates in excess of the corporate tax rate (currently 30%), the establishment of a corporate beneficiary should be considered. The corporate beneficiary would receive a distribution of income from the family trust each year and pay tax at the corporate rate. This can be an effective strategy if the owner is prepared to invest in certain types of assets through the corporate beneficiary.
Pty Ltd Company
A Pty Ltd company is still the most common and in many cases the appropriate operating structure, particularly where capital gains are not likely and where the small business capital gains tax concessions will not apply. Companies also have the benefit of limited liability, although directors may be required to give personal guarantees in certain situations.
Partnership
Partnerships are often the preferred structure for many husband and wife businesses and also where personal services are provided. Whilst partnerships are a simple and cost effective structure, the major disadvantage is that there is no asset protection. The partners are each personally liable for the debts of the partnership should the business fail.
One way of providing some asset protection for the partners would be to rollover the business into a company. This means that the business is owned and operated by the company and the partners are shareholders in the company. There is no capital gains tax on transfer of the business into the company if the rollover is correctly structured.
Superannuation fund
A self-managed superannuation fund is not an appropriate structure for a business operation, but it is often the preferred vehicle for long term investment with its low tax rates and asset protection. The Government's encouragement for superannuation funds to pay pensions whether on an allocated or actuarial basis means that these funds can now be a "whole of life" investment vehicle.
If you would like to discuss the best structure for your business, please call ARW.
