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|