Business Structures And Risk Management (Generic)Presentation Transcript
BUSINESS STRUCTURES & RISK MANAGEMENT
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
Other factors can also be important, such as:
2 Your borrowing requirements;
3 Your ability to maintain the structure;
4 Admission of other people into your
SOLE TRADER Contracts with third parties Liabilities Business Name Income Tax As a sole trader, you are trading as an individual.
Simple and easy to understand.
Low administrative and running
Usually only simple accounting
techniques are required.
Difficult to split income with another
party for taxation purposes.
Your liability is not limited so you risk
having all your assets available to
The structure cannot survive the death
of the trader.
PARTNERSHIP Generally, a partnership is defined as a relationship which exists between persons carrying on a business in common with a view to profit.
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
Your liability is not limited and you
expose yourself to being held liable
for the actions of your partner
Partnership itself does not pay tax.
Relatively inexpensive to establish
(although a Partnership Agreement is
Possible to split income.
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.
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.
Main Features of a Discretionary Trust are:
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.
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.
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
ADVANTAGES & DISADVANTAGES OF DISCRETIONARY TRUSTS
Income sharing within the family;
Can employ individuals and provide
You can refinance working capital;
Limitation of liability if the trustee is a
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.
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
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”.
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.
own the company and have limited liability as to the extent of their paid up share capital
control the management, directions and day to day activities of the company
have many powers and responsibilities in relation to the company
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.
- Buy Sell Deeds;
- Succession Planning.
BUSINESS RISK / PERSONAL
Business interruption / loss of profits
Total and Permanent Disability
Directors and Officers Liability
Workplace Insurance (if employing)
BUY SELL DEED
Call option / Put option
Total and Permanent Disablement
Timing of claim
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