For established and growing businesses it is likely you will outgrow a sole proprietor, or individual partnership business/tax structure and start looking at a more sophisticated structure that can be established for both asset protection and taxation purposes.
The following business/tax structures are explained in more detail below:
- a family trust
- a partnership of family trusts
- a unit trust, and
- a private company
A family trust is also known as a discretionary trust. It is a fantastic structure for a single family business. Its main benefit for business is the ability to distribute the income earned from the trust, in any way the trustee sees fit, provided it complies with the trust deed. A family trust also offers asset protection both for the family members and the business. If a family member is sued personally, the assets of the business are protected, and vice versa.
There are also opportunities to pass the business down to a younger generation without capital gains tax and the ability to access capital gains tax discounts on the sale of your business, or its assets, that are not available to all other entities.
Partnership of Family Trusts
For a business that involves more than one family, a Partnership of Family Trusts is a sophisticated and well balanced structure. In this structure two family trusts, for the two partners, are empowered to operate by two trustee companies respectively. It’s important to have brand new trusts and companies for this structure for asset protection purposes. This is a Partnership so it will be administered under Partnership Law meaning there is joint liability for the trusts running the business. As a result we recommend these trusts deal with the business only and no private investment assets should be bought in these trusts.
A Unit Trust is also a popular structure for partners in business together. It is easier to administer in comparison to a partnership of family trusts, when partners exit or new partners are added to the business. With a Unit Trust, the partners hold a fixed number of units and so they receive a fixed proportion of income per year and this is set out in the trust deed. The Unit trust should have a Trustee Company to operate it for asset protection purposes and usually the units are held by a family trust of each partner.
A Private Company is another structure that you may choose to run your business from. This is the simplest business structure of the possibilities described above because the entity is taxed for its yearly income before there are distributions to the Partners or owners. This structure is easily understood, however a major disadvantage with a private company is that if you sell your business you may not have access to all the capital gains tax discounts which could leave you paying substantially more tax than other structures.
There are a number of factors that will affect your decision on the appropriate business/tax structure so you will need to contact GGA to consult on which one is best for your circumstances. In particular there have been a number of changes to trusts recently that will require this specialist advice for your business.