Business Structuring - Don't Have A Fit!

Friday 17 March, 2006

by Michael McClaren

There are many important things to consider when it comes to the structuring of a business. The structure impacts on not only the business, but the owners as well. The types of entities employed and the ownership of those entities can have far-reaching implications that extend beyond just income tax. Those implications include stamp duty, capital gains tax and pension planning to name just a few.

The types of entities commonly employed include sole-traders, partnerships, discretionary, unit and hybrid trusts, companies and self-managed super funds. Some of these such as companies are separate legal entities, while others such as trusts and self-managed super funds can only act through trustees. It is important to remember that each type of entity has its place in appropriate circumstances.
The entity and ownership structure really should fit with the business plan and vision as well as the personal goals and objectives of the owners. To achieve good fit there are a number of factors to be assessed including:-

• Understandability
  
  Quite simply, it is easy to fall foul of rules simply because the structure and how it works is not understood. An example is overdrawn loan accounts in companies which can be very costly.
  
• Establishment Costs
  
  Costs vary considerably. Companies cost about $1,000 to incorporate. A Trust Deed costs about $400 to prepare.
  
• Administration Costs
  
• Some entities have on-going costs associated with them. For example companies have a $200 annual return fee payable to the Australian Securities & Investment Commission.
  
• Tax Implications
  
  Different rates of tax can apply. For example the company rate is a flat 30% of taxable income. Potentially the Capital Gains Tax concessions apply differently depending on the entity. Primary producer tax averaging is available for individuals but not companies. Fringe Benefits Tax can potentially apply where there is an employer/employee relationship if the owner is an employee.
  
• Transferability
  
  Ease of entry and exit can be important. As generational change takes place there is often a gradual or incremental change of ownership. How this is achieved depends on the entity in question and the Stamp Duty impost can be vastly different also.
  
• Asset Protection
  
  Regardless of the type of business there is wisdom in keeping valuable assets removed from trading operations or individuals that act as Directors.
  
• Centrelink Planning
  
• There are very specific (and some might say unfair and unreasonable) rules applying to Trusts. Great care needs to be exercised in dealing with Centrelink and the choice of entity can be critical.
  
• Self-Employed vs Employee Status
  
  Partners are invariably treated as self-employed. However, in a company structure the owners are almost always employees as well. This distinction impacts on matters as diverse as the preparation of a Will, to the timing of tax payments.
  

Business structuring is not only about tax. There is a range of matters to consider as detailed above. If this is done well, a good fit can be achieved between the structure and the business and its owners which as far as possible meets the needs of all stakeholders.

Source:ceoonline.com