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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.
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
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