Business Structures – Adelaide
Whether you are setting up a new business, looking to restructure an existing business, or dissolve a partnership, Scammell & Co. can advise you on all aspects of business structures including the drafting of operation agreement documents. There are four common business structures to choose from: sole trader, partnership, company and trust. Other structures include joint ventures and franchises. Scammell & Co. can provide advice as to the best business structure for your needs and goals – taking into account your business’ legal and operational risk; what control you have over the business; tax implications; establishment and ongoing costs; profit distribution; personal financial liability and asset protection.
A sole trader is the simplest business structure and easiest to set up. Individuals operate under their own name and as such are legally responsible for all aspects of the business.
A partnership is an association of two or more people or entities running a business together. A partnership can be set up simply and cost-effectively. However, there are disadvantages, for example, partners are jointly responsible for the debts of the business and equally liable for the actions of other partners.
A company structure provides greater protection than is available to sole traders or to partnerships. As a comapny is a separate legal entity in its own right its shareholders’ personal liabilities are limited to unpaid calls (if any) on their respective shares. Unless directors behave unlawfully or knowingly allow the comapny to trade whilst insolvent then those directors also generally enjoy limited personal liability not available to sole traders or partners. The added advantage to a company structure can be the relatively low tax rates applicable (although companies do not receive tax free thresholds received by sole traders or partners).
Many Australian businesses be they small and medium enterprises or larger corporate holdings take advantage of trusts to maximise the effectiveness of and protect their commercial interests.
Trust structures can be set up to provide asset protection, tax effective benefits, flexibility and control to individuals and businesses, as well as succession planning.
One way of understanding trusts is to think of them not as a separate legal entity but rather a relationship that is recognised and enforced by the courts. It governs how a person (the trustee) as the legal controller/owner of trust property (assets) may deal with that property for the benefit of another person (the beneficiary), for the advancement of certain purposes.
Key roles include:
A settlor (in most instances unrelated to the trustee or beneficiaries) is usually a lawyer or accountant who provides the trust property which establishes the trust. If a settlor is not excluded from receiving benefits under the trust, taxation penalties can apply.
A trustee is the legal owner of the trust property which it holds subject to the terms of the trust for the benefit of the beneficiaries. The trustee must fulfil duties such as being aware of and acting in accordance with the terms of the trust and ensuring proper books and records are kept.
A beneficiary is the person with rights to enjoy or benefit from the trust property.
A Trust Deed can set out the terms of the relationship between the trustee and the beneficiary with respect to the property. It usually describes who the trust is to benefit or what is its purpose; what property is the subject of the trust and what is the intention of the settlor.
Regardless of the type of trust being established all trusts must have trust property being held by at least one person or entity (trustee) for the benefit of at least one other person or entity (beneficiary).
Scammell & Co. can assist with various types of trusts including:
- Discretionary Trusts;
- Unit Trusts;
- Family Succession Trusts;
- Farm Land Trusts;
- Protective Trusts;
- Class Trusts; and
- Testamentary Trusts.
Discretionary Trusts take many forms and are commonly used by small and medium businesses in Australia. They are well-suited for family businesses because they maintain a high degree of flexibility and protection for beneficiaries.
A Discretionary Trust is drafted to give the trustee maximum discretion in deciding which beneficiaries benefit from the distribution of income and to what extent. They also offer several important taxation advantages.
However, not all businesses are good candidates for discretionary trusts. In some cases, taxation is more burdensome with a discretionary trust than with another business structure. Business owners may also find that the obligatory compliance is more than they want to manage.
Some of the pros and cons of discretionary trusts include:
- Discretionary trusts allow for the accumulation of assets for beneficiaries;
- They give flexibility over capital and income distribution;
- Discretionary trusts also offer the potential for simpler reporting; and
- They enable discounts on capital gains taxes.
- Beneficiaries lack proprietary legal interest in trust property;
- Taxation disadvantages can apply to incorrect distribution decisions; and
- Discretionary trusts can also be subject to regulatory (compliance) burdens.
With a discretionary trust, a trustee (or trustees) hold the property for the beneficiaries, and an appointor may be nominated in the trust deed with the power to hire and fire the trustee. In such a case the appointor has ultimate control over the wealth in the trust.
The beneficiaries of discretionary trusts are usually immediate and extended family members, other family companies and charities. They don’t all have to be named at the establishment of the trust as long as they are included as part of a class of beneficiaries. In a discretionary trust, beneficiaries have no interest in the trust property unless the trustee exercises its discretion to distribute to them. Any attempt to add beneficiaries later can constitute a resettlement with capital gains tax and stamp duty disadvantages.
The trustees can decide to distribute income or capital among the beneficiaries as they see fit. They’re not held to predetermined arrangements or agreements. This offers a great deal of flexibility, but might seem too nebulous for some stakeholders.
What works well for one business may not be the best choice for another business, which is why it’s important to weigh the pros and cons of a discretionary trust structure for your unique situation.
Weighing the Pros and Cons of Discretionary Trusts:
For businesses that are operated by two or more independent people (not members of the same family), discretionary trusts are less common and less appropriate. This is because independent parties generally want to know exactly who will receive what in order to make wise investment and business decisions.
If flexibility is important to you, a discretionary trust may be the best option. It provides asset protection in that it can prevent a beneficiary’s creditors from accessing key assets. Therefore, if a business goes bankrupt, it may be more difficult for creditors to have access to any property held in the discretionary trust.
Also, the trustees maintain complete control over income and capital distribution. If the net income is distributed by the end of each financial year, taxes may be minimised.
Depending on the complexity of your discretionary trust, the establishment and administrative costs could be more expensive than some other business structures. It would be wise to seek professional advice regarding the costs of a discretionary trust that suits your business.
A unit trust is one where the assets are held and administered by the trustee of the trust for the holders of units in the unit trust. This means that unit trusts pre-determine the unit holder’s entitlements, which may be for income, capital or both.
Unit trusts are often used where unrelated parties run a business together and where the units are then held by a family trust and for managed funds where investors hold units in the trust. They have limited application for most personal investments, although some use them to hold property with the unitholder being a family trust.
Family Succession Trust
A family succession trust is a form of trust where the deed is modified to provide increased asset protection in an estate planning and family law context. This is done by restricting distributions of trust income and assets to blood relations (as opposed to those related by marriage or de facto relationship). Given the soaring divorce rate and the growing rights of de facto partners, such trusts are becoming more and more popular particularly among small business owners and rural land owners.
While the beneficiaries of a family succession trust are specifically restricted to descendants of the named individual or individuals, greater flexibility can be given in respect of the income of the trust estate. Distributions of income may be similarly restricted or relaxed to include a wider range of beneficiaries including spouses. However, the Family Court has the power to declare such arrangements as a sham, thereby rendering them ineffective.
To provide additional family asset protection it is desirable that more than one person should have control of a Family Succession Trust.
Farm Land Trust
A Farm Land Trust is a discretionary or other trust where potential beneficiaries is restricted to persons who fall within the range permitted (family members) under the provisions of section 71CC of the Stamp Duties Act 1923. These are used to hold farm land in South Australia allowing the land to be transferred to the trustee without the imposition of stamp duty that would otherwise be payable.
A protective trust is a trust set up to benefit a person who may need assistance of some kind in managing his or her financial affairs. Either a trusted person or independent trustee manages the trust property (assets) for the person needing protection. The need for such protection may be temporary such as in the case of a minor beneficiary, or permanent as in the case of a disabled beneficiary. In this instance a ‘Special Disability Trust’ can be set up by the immediate family members of a disabled person, primarily for the current and future accommodation and care needs of that person.
A class trust is a trust in which there are two or more distinct classes of beneficiaries each entitled to a specific proportion of trust property (assets) and income. A class trust is essentially a combination of a discretionary trust and a unit trust, with each class defined in relation to a given individual who is entitled to a fixed proportion of the income and property of the trust. Within each class distributions are discretionary.
This creates a flexible structure which can be used for two or more independent parties. The classes may be defined so as to provide for flexible discretionary distributions within each class. These trusts are frequently set up with family succession in mind to allow for two or more children of the current controllers to have defined interests in the property and income of the trust. The current controlling individual, being related to each of their children, would then be a member of each class.
A testamentary trust is essentially any form of trust included in a person’s will. It only comes into effect after the death of the person making the Will. This type of trust provides a number of benefits including:
- Flexibility for your beneficiaries
The Trustee may distribute capital and income to any nominated beneficiary at any time and in any proportion. A Testamentary Trust gives the beneficiaries both flexibility and control over when and how they take their inheritance.
- Protection of assets
The assets form part of a Trust and therefore they cannot be taken out of the Trust without the Trustee agreeing to distribute them to the beneficiaries. None of the assets are legally owned by the beneficiaries which may protect the assets of the Trust in the event of:
- Divorce/relationship breakdown of a beneficiary
- Protection from creditors of a beneficiary
- Beneficiary in a high-risk profession or business where negligence claims are likely
- Will challenges
- Protection of beneficiaries
A Trust can protect the interests of vulnerable beneficiaries with regards to:
- Social Security entitlements
- Extravagant or wasteful spending habits including gambling/drug addictions
- The diverting of family assets to a new family through remarriage
- Family assets used in risky or unprofitable ventures
- Tax effective allocation of income to Beneficiaries who are either unemployed or under the age of 18 years
A Scammell & Co. commercial and company lawyer can, in accordance with South Australian legislation, draft new trust deeds, amend existing deeds, advise in relation to the winding up of trusts, and provide advice to trustees and beneficiaries on various issues which arise.