We often find that business owners do not understand what entity type/structure they operate as. One of the most common examples we see is when a Trust with a Corporate Trustee is used however the business owner believes they are operating as a Company.
So… what are the differences and what are the benefits of each structure?
The most common structures that you will come across are Sole Traders and Partnerships. Simply put a Partnership is like a Sole Trader with a number of partners. This is a very common structure for mum and dad type businesses. It is easy to setup and close, but offers very little in the way of asset protection in it’s own right.
A Company is a separate legal entity and operates much as an individual person would. It owns it’s own assets, can sue or be sued, and pays tax in it’s own right. It has shareholder/s that own it and therefore are entitled to a share of the profits at such times as the Company distributes profits (called Dividends). Directors are the individuals who operate the business day-to-day and execute contracts etc. This structure adds significant asset protection since it separates the shareholders from the business, and from the risks associated with the business. There can be some risk involved for Directors, but they are generally safe provided they act properly.
Another very common structure is Trusts. These come in a number of styles, but generally are Discretionary or Unit Trusts. A Unit Trust will generally have fixed entitlements to distribute profits, whereas a Discretionary Trust has the ability to distribute to a specific list of beneficiaries at their discretion.
A Trust has a couple of key people or entities involved. Firstly there are beneficiaries – being those that may receive income. These are either the Unit Holders or related parties to the Specified Beneficiaries (i.e. Spouse, parents, children, grandchildren, companies controlled etc).
The Trust will also have a Trustee – being the day to day controller and in whose name assets are held. The Trustee can be either an individual or, to create clear separation between the individuals and the Trust, a Company is often utilised (e.g. ABC Pty Ltd as Trustee for The ABC Trust). This is the reason many business owners can mistakenly believe they operate as a Company.
The third key individual/entity involved in a Trust is a very crucial party and is referred to as the Appointor – The Appointor is the ultimate controller as their main task is to appoint and remove the Trustee.
There are many pros and cons to each structure and often a combination of the above structures will be used to provide the best business and asset structuring.
If you would like any further information in relation to structures or would like to review your structure please contact us at Green Taylor Partners. We can provide advice on your current structure and also offer possible options going forward.
Liability limited by a scheme approved under Professional Standards Legislation