Business Structures And Risk Management (Generic)

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  • 1.  
  • 3. When you own and operate a business, whether buying an existing business or starting up a new business, you should be aware of the different business structures that are available to you. CHOICE OF BUSINESS STRUCTURE There are several forms of business structures available such as: Sole trader Partnership Joint Venture Trust Company Or a combination of the above. The hardest thing about deciding on what type of business structure to adopt is not only trying to understand the different structures available, but also understanding what type of structure is most suitable for you.
    • Three factors that are commonly thought about when deciding what type of structure is better are:
      • Limiting your liability
      • Maintaining control; and
      • Minimising tax.
    • Other factors can also be important, such as:
      • Succession planning;
      • 2 Your borrowing requirements;
    • 3 Your ability to maintain the structure;
    • and
    • 4 Admission of other people into your
    • structure.
  • 4. SOLE TRADER Contracts with third parties Liabilities Business Name Income Tax As a sole trader, you are trading as an individual.
    • Some Advantages
    • Simple and easy to understand.
    • Complete control.
    • Low administrative and running
    • costs.
    • Usually only simple accounting
    • techniques are required.
    • Some Disadvantages
    • Difficult to split income with another
    • party for taxation purposes.
    • Your liability is not limited so you risk
    • having all your assets available to
    • third parties.
    • The structure cannot survive the death
    • of the trader.
  • 5. PARTNERSHIP Generally, a partnership is defined as a relationship which exists between persons carrying on a business in common with a view to profit.
    • Some Disadvantages
    • You only have control over the
    • business proportionate to your
    • interest in the partnership assets.
    • Your interest in the partnership is not
    • easily transferable to another.
    • You may be bound to use the same
    • taxation elections as the other
    • partner.
    • Your liability is not limited and you
    • expose yourself to being held liable
    • for the actions of your partner
    • Some Advantages
    • Partnership itself does not pay tax.
    • Relatively inexpensive to establish
    • (although a Partnership Agreement is
    • strongly recommended).
    • Possible to split income.
    • Partnership agreement
  • 6. DISCRETIONARY TRUST Settlor Trustee (Usually a company) Discretionary Trust Beneficiary 1 Beneficiary 3 Beneficiary 2 Beneficiary 4 The person who settles the trust, usually for a nominal sum The trustee has legal ownership of trust assets for the beneficiaries As Trustee of Appointor The person who controls the appointment & removal of the trustee, and thereby indirectly controls decisions concerning the trust Beneficiaries have an “expectant interest” only in the income and assets of the trust.
  • 7. TRUSTS Conceptually, a Trust is an obligation on one person to hold property for the benefit of another. The property is dually owned. The trustee has legal ownership and the beneficiary has equitable ownership. Predominant types of trusts used in business structures are: Discretionary Trusts The entitlement of beneficiaries to both income and capital is generally at the discretion of the trustee. Unit trusts In a unit trust, each unit holder has a fixed entitlement in the trust estate and any income flowing through the trust is distributed to each unit holder in proportion to their entitlement. The Discretionary Trust Deed A discretionary trust deed creates the trust and it should set out the rights and obligations of the trustee, the appointer and the beneficiaries. Please note that not every trust deed is standard and it is recommended that you seek legal advice before signing a trust instrument.
  • 8. Main Features of a Discretionary Trust are:
    • The Settlor
    • Contributes a nominal sum to establish the trust;
    • Usually a friend or an employee of your law firm; and
    • Cannot be a person who is or will be a beneficiary of the trust.
    • The Trustee
    • Powers and responsibilities of the Trustee are extensive and should be detailed in the trust deed;
    • The trustee may be an individual, but more commonly is a company; and
    • The trustee has legal ownership of the trust income.
    • The Beneficiaries
    • These are the individuals that have a beneficial interest in the trust income. The Interest is not fixed and it is up to the discretion of the trustee how much of the trust income is distributed to each beneficiary;
    • Generally, beneficiaries will include the members of your family.
    • The Appointor (or The Principal)
    • The Appointor has the power to appoint and remove the trustee and, therefore, indirectly controls who makes decisions concerning the trust; and
    • The Appointor can be an individual or a company
      • Income sharing within the family;
      • Can employ individuals and provide
      • salary packaging;
      • You can refinance working capital;
      • Limitation of liability if the trustee is a
      • company; and
      • Tax advantages.
      • More expensive to set up and run than a
      • partnership or sole trader;
      • Knowledge of director responsibilities
      • are required if the trustee is a company;
      • Must distribute income to someone at
      • year end; and
      • Losses can be trapped in the trust.
  • 10. UNIT TRUST CORPORATE TRUSTEE Trading Company THE BUSINESS UNIT TRUST Corporate Trustee Corporate Trustee as trustee for as trustee for ARAGON FAMILY TRUST LEGOLAS FAMILY TRUST Director – Aragon Director – Legolas
    • Unit Trust Deed
    • Unit holders Agreement
    50 50
  • 11. COMPANY
    • The main features of a company are:
    • it is a separate legal entity incorporated under the Corporations Act 2001 (Cth);
    • companies are regulated by this Act and their constitution;
    • it can sue and be sued in its own name;
    • it can own property and incur debts in its own name;
    • it has perpetual succession – unaffected by death or the bankruptcy of members;
    • it can contract with shareholders;
    • it basically enjoys the same rights/incurs same obligations as natural persons; and
    • when a company cannot pay its own debts, instead of the company becoming bankrupt, the company becomes “insolvent”.
    • Some Advantages:
    • Limited liability (subject to some conditions).
    • Relatively easy to introduce participants.
    • Can employ individuals and provide salary packaging.
    • Company tax rate is a flat 30%.
    • Low stamp duty rates on share transfers and no stamp duty on issuing new shares.
    • Shareholders
    • own the company and have limited liability as to the extent of their paid up share capital
    • Directors
    • control the management, directions and day to day activities of the company
    • have many powers and responsibilities in relation to the company
    • Some Disadvantages:
    • More expensive to set up and run than a partnership or sole trader.
    • Separate tax return and company accounts required.
    • Knowledge of director’s responsibilities required.
    • Can be less effective in limiting liability if you undertake to become guarantors for the company.
    • The process of managing exposure to risks that could harm your business or the individual associated with the business.
    • Identify the risks;
    • Put in place procedures to prevent and/or control risks, or reduce the likelihood of occurrence
    • Some ways to reduce/ minimise exposure to legal risks include:
      • - Business Structure;
      • - Operating terms, including: * trade terms; * supply chain strategies; * written contracts with warranties & indemnities; * seeking guarantees when contracting with certain legal entities.
      • - Insurances;
      • - Buy Sell Deeds;
      • - Succession Planning.
    • Assets
    • Public liability
    • Business interruption / loss of profits
    • Business expenses
    • Income protection
    • Life insurance
    • Health
    • Total and Permanent Disability
    • Directors and Officers Liability
    • Workplace Insurance (if employing)
    • Business Associates
    • Call option / Put option
    • Triggering events
    • Death
    • Total and Permanent Disablement
    • Insurance proceeds
    • Timing of claim
    • Repayment Options
    • Premia
  • 14. TYPICAL STRUCTURE ASSET HOLDING ENTITY RISK ENTITY THIRD PARTIES Asset/IP Licence Contracts with Mortgage Debenture Charge Trust Holding Company Pty Ltd as trustee for Trading Company Pty Ltd Customers
    • OWNS
    • Intellectual Property
    • Trademarks
    • Business Assets
    • Land
    • Business Name
    • OWNS
    • Stock
    • Some trading assets
    • Business goodwill
    Landlord Suppliers and third parties
  • 15. Contact Details: PO Box 185, Maroochydore QLD 4558 T: 5458 9999 F: 5458 9988 [email_address]