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Getting your business structures right is an important part of both asset protection, estate planning and tax planning.

With the right structure, you can rest assured knowing that you’re set up, ready for what business and life can throw at you.

A sound structure is usually made up of a number of entities including companies, trusts, individuals and self managed super funds.

You could choose a:

  1. Company;
  2. Trust (in its various forms such as family trust, discretionary trust or unit trust);
  3. Sole Trader;
  4. Partnership; or
  5. Self Managed Super Fund.

But it all comes down to the specific purpose for that particular entity. For instance, it is best practice to have business trading entities separate from those that hold assets like an investment property.

The choice of how to structure your business depends on a number of factors:

  1. The type of business you operate;
  2. The regulatory requirements for your industry;
  3. Your existing wealth and income levels;
  4. How large you intend to grow the business; and
  5. Whether you are building the business for lifestyle or eventual sale.

Your budget for a business structure depends entirely on your circumstances and the intended use for the structure. It can cost anything from a few hundred dollars to tens of thousands of dollars to ensure you’re set up in the best structure for your circumstances.
It’s always best to keep the end in mind too when planning your structure out. And it is possible to set up structures in stages, where you can increase the level of asset protection, estate planning and tax planning as you progress.

Here’s a comparison table of the most common questions about Business Structures:

A basic comparison of the most common business structures is provided below:Sole traderPartnershipCompanyTrust
Cost to establish and operateLowMediumHighHigh
ComplexitySimpleModerateComplexComplex
Limited LiabilityNoNoYesYes (with a corporate Trustee)
Do I receive full profits made from the business?YesNoNoNo
Can I employ staff?YesYesYesYes
Do I have to pay myself superannuation?NoNoYesNo
Can I change the legal structure easily?YesNoNoNo
Good ability for tax planning?NoLimitedLimitedYes
Is it easy to raise capital?NoNoYesYes
Is it easy to dissolve or exit?YesYesNoNo

 

Each structure has advantages, disadvantages and responsibilities which need to be considered before making a decision.

The best bet is to engage an adviser who knows the ins and outs of business structures and can help apply their knowledge to your specific circumstances.

If you’re looking for an adviser for a structuring session, do drop us a note or give us a call on 1300 852 747. We can even organise a web session too.

A company is a separate legal entity to the individual business owner(s). Companies are the most familiar choice when business owners are interested in restructuring their operations.

It is fairly well known that a company owns the business assets and provides some form of protection for personal assets. However, there is far more to consider when choosing a business structure than asset protection.

A company is run by a set of rules called the constitution. The constitution is normally set in place when the company is established, which outlines the powers of directors, shareholders, things that the company can do and so on.
Companies are governed by the ASIC (or Australian Securities and Investments Commission) who ASIC also keep a public record of the company’s details on their system. You can access these details for any company in Australia by paying for a company search to be performed.

Each year, ASIC require that a Annual Review Fee is paid for each company in existence.

This fee is currently $243 payable two months following the registration date anniversary.

Companies are owned by members or shareholders.

Yes, certain types of companies are allowed by ASIC to only have one director. These include Pty Ltd companies.

It is also important to note that the constitution must allow for the company to have one director.

FAQs

Unfortunately companies aren’t eligible for the discount.
We would rarely recommend that an investment that was to be considered a Capital Gains Tax Asset (or CGT Asset) be purchased by a company. Ideally CGT Assets are held in the name of a family trust, individual, or self managed super fund which can all access the 50% CGT discount.

Yes, the ATO has made it clear that directors fees and wages require superannuation to be paid on them. This is because the company is classed as their employer.

There are a few ways of bringing money out of a company as the owner.
This also has to be done within the rules set out:

  1. Drawings – Drawings are easy to take out, although you must be sure not to treat the company as an atm without considering other consequences. The main consequence is what is called “Division 7A”. This is where there is an outstanding loan owed from a shareholder (or their associate) back to the company. If these loans aren’t treated correctly, it can mean a nightmare to the shareholder who has drawn the loan.
  2. Wages or Directors Fees – Wages or Directors fees are the most simple and straightforward way of bringing money out of a company. You are treated similarly to the company’s employees, where super is payable and tax is withheld from the payments.
  3. Dividends – Dividends require that there are retained earnings in the company. (Retained earnings are profits that the company has made in prior years.) This also in most cases creates franking credits, which attach themselves as a sort of prepaid tax to those who receive the dividend.

Discretionary Trusts, otherwise often known as family trusts, are a popular business structure in Australia.
The main advantages of a discretionary trust are the way in which the profits are distributed, while still providing for asset protection if you’re using a corporate trustee.

A discretionary trust also does not stand alone – it requires what is called a ‘trustee’. In simple terms, the trustee controls the trust. You can choose this to be you (or more than one person) as an individual, or you can choose to have a company act as trustee.
A discretionary trust is a separate entity to you as an individual as long as you have a corporate trustee. This means it runs its own books, and the business is distinguishable from the person running the business.

To distribute profits, the trust acts as a ‘funnel’ if you will. What I mean by this is that profits come into the trust, building up over the financial year.
They shouldn’t remain in the trust at the end of the financial year, otherwise the trustee of the trust will be responsible for paying the top marginal rate of tax (currently 47%) on the income of the trust.

Before the financial year finishes, a distribution minute is drafted and signed, which discloses to whom the profits are going to be distributed for the financial year.

This depends on the trust’s deed.
If the trust deed allows for separation and distribution of different classes of income, then this is acceptable.

You may be able to separate the income into groups like:

  • Franked dividends;
  • Business income;
  • Capital gains;
  • and a catch all “other income” group.

We wouldn’t recommend that you set up a discretionary trust on its own to work with a business partner.
There are other options for this such as a company, unit trust or even a partnership of discretionary trusts where you can set up the rules of working with the business partner.

Absolutely.
But please do not run a business AND hold investments in the same trust. This exposes the investments to the risk of the business, as it is controlled an existent in the same entity.

The Family Trust, commonly set up and sometimes referred to as a discretionary trust, are a popular business structure in Australia.

The main advantages of a family trust are the way in which the profits are distributed, while still providing for asset protection if you’re using a corporate trustee.

At the end of the day, “discretionary trust” and “family trust” are more often than not interchangeable.

For tax purposes though, a trust is not considered a “family” trust until a “Family Trust Election” is made.

A family trust election (abbreviated to FTE) is recommended in one of four scenarios:

  1. If the trust is carrying forward tax losses;
  2. If the trust owns a company that contains losses;
  3. If the trust receives franking credits on dividends; or
  4. If the trust distributes to another trust.

A Family Trust Election is something that your accountant prepares in your tax return in the year it is required as a once off. It is also disclosed each financial year after that on the front page of the tax return.

A family trust also does not stand alone – it requires what is called a ‘trustee’. In simple terms, the trustee controls the trust. You can choose this to be you (or more than one person) as an individual, or you can choose to have a company act as trustee.

 family trust is a separate entity to you as an individual as long as you have a corporate trustee. This means it runs its own books, and the business is distinguishable from the person running the business.

To distribute profits, the trust acts as a ‘funnel’ if you will. What I mean by this is that profits come into the trust, building up over the financial year.
They shouldn’t remain in the trust at the end of the financial year, otherwise the trustee of the trust will be responsible for paying the top marginal rate of tax (currently 47%) on the income of the trust.

Before the financial year finishes, a distribution minute is drafted and signed, which discloses to whom the profits are going to be distributed for the financial year.

This depends on the trust’s deed. If the trust deed allows for separation and distribution of different classes of income, then this is acceptable.

You may be able to separate the income into groups like:

  • Franked dividends;
  • Business income;
  • Capital gains;
  • and a catch all “other income” group.

We wouldn’t recommend that you set up a family trust on its own to work with a business partner.
There are other options for this such as a company, unit trust or even a partnership of family trusts where you can set up the rules of working with the business partner.

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