Business Structures

Choosing an appropriate entity to acquire or transfer assets has become increasingly difficult in recent times primarily because of competing tax issues, industry regulation and changing client objectives that may not be supported by the particular entity at the outset.

Typically, the potential structures are: sole trader; partnership, trusts and or a company.

The decision on the structure should consider owner’s immediate and future objectives weighed up with the costs and complexities.

These major considerations will usually include: taxation consequences, simplicity and cost of creating the structure, potential risk of failure of the business, nature and size of the business, potential for growth and the need for additional capital, and nature and extent of control and management required for the business.

Advantages and disadvantages of each structure

Sole Practitioner Partnership Companies Discretionary Trusts Unit Trusts
Asset protection Low100% liable LowJointly and severally liable HighLimited liability to shareholder HighLiability rests with the trustee provided ‘risky’ assets quarantined MediumLimited liability to unitholder
Distribution flexibility None Subject to partner Dependent on shareholders High Dependent on unitholders
Suitability for raising equity None None Yes None Yes
Ability to split income No Subject to partner Dependent on shareholders High Dependent on unitholders
Capital gains tax (CGT) concessions CGT 50% discountSmall business CGT exemptions CGT 50% discountSmall business CGT exemptions, provided conditions satisfied Small business CGT exemptions but not CGT 50% discount CGT 50% discountSmall business CGT exemptions CGT 50% discountSmall business CGT exemptions
Working capital rates of tax Marginal rate Subject to marginal rate of partner Corporate tax rate Subject to marginal rate of beneficiaries Subject to marginal rate of beneficiaries
Access to carry forward losses Yes, no tests required Yes, no tests required Yes, requires Continuity of Ownership or Same Business tests to be satisfied Yes, but requires tests to be satisfied Yes, but requires tests to be satisfied
Access to franked distributions Yes Yes, and if partner of trust, with a family election for >$5,000 Yes Yes, requires family trust election for >$5,000 Yes, requires family trust election for >$5,000 or unit trust is fixed
Ability to succession plan Yes, under will Yes, dependent on partner and partnership agreement Yes under will or hardwiring provisions in constitution Yes under will and an ‘appointor role’ Yes, dependent on unitholder and unitholder agreement

Please Note : Many of the comments in this article are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.