Last week, I wrote about the importance of your legal structure and detailed two of the basic structures (I hope it was helpful!). So now I’ll dive straight into the nitty-gritties of a company and two types of trusts, which is where the real structuring decisions take place. If the following structures are not already part of your ‘Structuring Tree’, then take out your notepad and pen (I’m kidding, open Evernote or Google Docs) and don’t forget to leave your comments below.
- Company – this structure is known as a ‘separate legal entity’. This means it can sue and be sued and it can also buy and sell assets. Companies also have ‘limited liability’, meaning the shareholders are protected from the actions of the company and its director/s. Companies are governed by the Australian Securities and Investments Commission (ASIC)and they receive an ASIC Certificate of Registration along with an Australian Company Number (ACN) when established. When most companies are established they adopt a constitution which falls under the Corporation Act 2001. For example, if you’re a director of a small company, you must follow the requirements set out in the Corporations Act 2001. Private companies need to have at least one director and one shareholder at all times. The shareholder can be any of the below mentioned structures, with the most common being a discretionary trust. Companies also attract a flat tax rate of 30%. So if you had $100,000 profit for the year, your tax payable would be $30,000. This is the preferred structure for capital raising and is usually a requirement for future investors into your business.
- Unit Trust – (…now we are getting into the exciting stuff!) Upon establishment, you need to nominate the trustee (a person/s or company) and the initial unit holder/s (usually a person/s or discretionary trust/s). Each year, the trust may make a profit or a loss. If it makes a profit, then the profit needs to be distributed to the unit holders (unless you would like to pay 46.5% tax? I didn’t think so!). The type of units you hold dictates what you are entitled to; be that trust income, trust capital, or both, and in what proportion. If you held 50 income units and I held 50 income units, then the profit would be split 50/50 between you and I. Unit holders can sell or transfer their units and the trust can buy the units back or issue new units to current holders and/or new unit holders. The trust is bound by a ‘deed’ which is basically a set of rules, you know, do’s and dont’s. The trust will also need to register for a TFN and ABN and it is wise to have a solicitor draft a unit holders agreement upon establishment. A tax return will need to be lodged every year and most deeds state that you need to prepare a set of financial statements as well.
- Discretionary Trust – Upon establishment, you need to nominate the trustee (a person/s or company), the beneficiaries (usually Mum and Dad), the settlor (usually your accountant or solicitor) and the appointer. I will go through these positions in further detail in a future post so don’t worry if you are feeling overwhelmed. The Discretionary Trust, also known as a Family Trust, is very common for businesses and families who wish to protect their assets and minimise their tax. The official term ‘Discretionary Trust’ is used because the trustee has the discretion (or choice) to distribute profits to whomever he/she chooses. This means if Mum is home looking after the kids and not earning any income, it would make sense to distribute the funds to her to dramatically reduce the tax payable. The term ‘Family Trust’ comes from being able to distribute profits to your family, which again, is great for tax minimisation. Recent changes to tax legislation has tightened certain loopholes, BUT has not closed them! When used correctly, this is a great asset protection scheme for business and personal assets. The trust will need to register for a TFN and ABN. A trust tax return will need to be lodged every year and most deeds state that you need to prepare a set of financial statements each financial year.
So now that you’ve got some insight into different types of business structures, it’s time to think about your current (or future) structures and whether you have sought expert advice. It is A LOT easier to get this right from the beginning and it is not always given the right amount of priority.
If you have ANY comments, hit me up in the comments box!