Products and Services

Business Structures

Seagrims' Accounting Professionals have assisted many clients to set-up new business ventures and really know the benefits of each business structure.

Ensuring you choose the structure that best suits your needs is critical. Your decision will determine how you have to register your business and which laws you have to observe. It is vital that you understand the legal requirements of your business setup and seek advice when making a decision on your business structure.

There are four main business structures that are commonly used in small businesses. In increasing level of legal complexity, these are:

• Sole trader : an individual trading on their own.
• Partnership : an association of people or entities carrying on a business together, but not as a company
• Company : a legal entity separate from its shareholders.
• Trust : an entity that holds property or income for the benefit of others

Each has advantages and disadvantages.

(a) Sole Trader

This is the easiest method of starting a business. As sole proprietor you will be responsible for all business decisions and deal with all the financial matters.

ADVANTAGES

• Low registration fee.
• Simple business structure and documentation.
• You maintain total control over business decisions.
• All profits and capital belong to you.
• Ta benefits exist if profits are low.
• Other than the Income tax Act and contract law, no specific legislation applies.

DISADVANTAGES

• Your capital is limited by your personal assets.
• Limited expertise and no one else to share the workload.
• It will be difficult for you to take time off.
• Your responsibilities can cut into your family and holiday time.
• No one to operate the business when you are ill.
• You will be personally responsible for all debts and liabilities.
• It can be difficult to sell ownership of the business.
• There are tax disadvantages when profits are high.

(b) Partnership

A partnership is formed when two or more people go into business together. You can operate under your own names or with a registered business name.

ADVANTAGES

• Inexpensive to establish.
• Tax advantages exist if your business partner is from your family.
• Having a partner means more start-up capital.
• Broader range of knowledge, experience and skills.
• Some ability to take time off.
• It is relatively easy to dissolve and recover your share of investment.
• Your partner can sustain the business during your holidays or illness.
• Profits belong to you and your partners.
• Shared control reduces your individual burdens.

DISADVANTAGES

• Potential for disputes over profit sharing, administration and development.
• Personality clashes.
• You will be personally responsible for business debts and liabilities incurred by your partners.
• Your personal assets are at risk to settle partnership debts.
• There can be some taxation disadvantages.
• Conflict on deciding final authority.
• Problems when one person leaves or another wishes to join.

(c) Company

A company is an independent legal entity. You will run the business as a director and own the business as a shareholder.

ADVANTAGES

• Your liability for the debts of the business is limited to the money you have invested in the business (unless you personally guarantee debts).
• Your limited liability can make it easier to attract investment.
• You can own and operate as the sole shareholder and director.
• You have no personal responsibility for debts unless the debts are reckless, negligent or fraudulent.
• A company can own property.

DISADVANTAGES

• Large initial establishment fee.
• Complex establishment rules.
• Strict regulations.
• Attract higher compliance costs than other business structures.
• Your business will be subject to company tax rates on every dollar of profit.
• Limitations on who can buy shares can make it difficult for shareholders to recover their investment.

(d) Trusts

What is a Trust?

A trust is a relationship where a person (the Trustee) is under an obligation to hold property for the benefit of other persons (the Beneficiaries). The terms of the obligation are defined by the terms of the Trust Deed entered into between the Trustee and the Settlor.

A trust is not a separate legal entity even though a trust tax return will be required to be lodged with the Australian Taxation Office each year. The Trustee is the legal owner of the trust property and the beneficiaries hold the beneficial interest in the trust property.

What is a Discretionary Trust?

In a discretionary trust the beneficiaries do not have a fixed entitlement or interest in the trust funds. The trustee has the discretion to determine which of the beneficiaries are to receive the capital and income of the trust and how much each beneficiary is to receive. The trustee does not have a complete discretion. The trustee can only distribute to beneficiaries within a nominated class as set out in the terms of the trust deed.

What are the elements of a Discretionary Trust?

In determining how a discretionary trust works the role of each of the six elements of a discretionary trust should be known. The role of the six elements may be summarised as follows:

1. The Trustee

The trustee is the legal owner of the trust property although not the beneficial owner. The trustee carries out all transactions of the trust in its own name and must sign all documents for and on behalf of the trust. The trustee's overriding duty is to obey the terms of the trust deed and to act in the best interests of the beneficiaries.

2. The Settlor

The settlor is the person who creates the trust by "settling" a sum of money or item of property on trust for the beneficiaries.

3. The Trust Fund

The trust fund is all the property of the trust including the settlement sum, accumulated income and any other money and property held by the trustee pursuant to the terms of the trust.

4. The Beneficiaries

The beneficiaries are the people (including entities) for whose benefit the trustee holds the trust property. A discretionary trust usually has a wide range of beneficiaries, including companies and other trusts. The beneficiaries of a discretionary trust do not have an interest in the assets of the trust. They merely have a right to be considered or a mere expectancy until such time as the trustee exercises its discretion to make a distribution.

The general beneficiaries are those beneficiaries named in the trust deed who are eligible to receive a distribution of income or capital at the discretion of the trustee (subject to the approval of the Appointor). The remainder beneficiaries are the beneficiaries automatically entitled to receive a proportionate distribution of income or capital to the extent that the trustee has not exercised its discretion otherwise.

5. The Appointor

The Appointor is the person named in the Trust Deed who has the power to remove and appoint trustees. The Appointor also has the power to approve any distribution of income or capital of the Trust to the beneficiaries and appoint or remove beneficiaries of the trust.

6. The Trust Deed

The trust deed defines the relationship between the trustee and the beneficiaries. The parties to the trust deed are the settlor and the trustee. The trust deed specifically sets out the duties and powers of investment of the trustee.