business structures and risk management (generic)
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:
1 Limiting your liability
2 Maintaining control; and
3 Minimising tax.
Other factors can also be important, such as:
1 Succession planning;
2 Your borrowing requirements;
3 Your ability to maintain the structure; and
4 Admission of other people into your structure.
SOLE TRADER Contracts with third parties
Liabilities
Business Name
Income Tax
As a sole trader, you are trading as an individual.
Some Advantages
• Simple and easy to understand.• Complete control.• Low administrative and running costs.• Usually only simple accounting techniques are required.
Some Disadvantages
• Difficult to split income with another party for taxation purposes.• Your liability is not limited so you risk having all your assets available to third parties.• 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.
Some Disadvantages
• 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 partner.• Your liability is not limited and you expose yourself to being held liable for the actions of your partner
Some Advantages
• Partnership itself does not pay tax.• Relatively inexpensive to establish (although a Partnership Agreement is strongly recommended).• Possible to split income.
•Partnership agreement
DISCRETIONARY TRUST Settlor
Trustee(Usually a company)
Discretionary Trust
Beneficiary 1 Beneficiary 3Beneficiary 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.
TRUSTSConceptually, 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:
The Settlor
• 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.
The Trustee
• 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.
The Beneficiaries
• 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
ADVANTAGES
• Income sharing within the family;
• Can employ individuals and provide salary packaging;
• You can refinance working capital;
• Limitation of liability if the trustee is a company; and
• Tax advantages.
DISADVANTAGES
• 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 foras trustee for
ARAGON FAMILY TRUST
LEGOLAS FAMILY TRUST
Director – Aragon
Director – Legolas
• Unit Trust Deed
• Unit holders Agreement
50 50
COMPANY 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”.
Some Advantages:
• 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.
COMPANY
Shareholders • own the company and have limited liability as to the extent of their paid up share capital
Directors• control the management, directions and day to day activities of the company • have many powers and responsibilities in relation to the company
Some Disadvantages:
•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.
RISK MANAGEMENT
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.
- Insurances;- Buy Sell Deeds;- Succession Planning.
INSURANCES
BUSINESS RISK / PERSONAL
•Assets•Public liability•Business interruption / loss of profits•Business expenses•Income protection•Life insurance•Health•Total and Permanent Disability•Directors and Officers Liability•Workplace Insurance (if employing)
BUY SELL DEED
•Business Associates•Call option / Put option•Triggering events•Death•Total and Permanent Disablement•Insurance proceeds •Timing of claim•Repayment Options•Premia
TYPICAL STRUCTURE
ASSET HOLDING ENTITY
RISK ENTITY THIRD PARTIESAsset/IP Licence Contracts
with
Mortgage Debenture
ChargeTrust
Holding Company Pty Ltd as trustee for
Trading Company Pty Ltd Customers
OWNS
•Intellectual Property•Trademarks•Business Assets•Land•Business Name
OWNS
•Stock•Some trading assets•Business goodwill
Landlord
Suppliers and third parties
