Business Structures. Going into business with a partner? Blog Written by Adept Legal - Robina

Updated: Aug 8, 2019



BUSINESS STRUCTURES


Going into Business with a Partner? What business structure should you choose?


Choosing the right business structure is one of the most important decisions you'll make when setting up your new business. We've summarised below the main options available, highlighting the advantages and disadvantages of each.


It's very important to have the right structure in place from the start. If you decide to change

business structures in the future, you may have to pay capital gains tax and stamp duty.


It's equally important to have a written stakeholder agreement in place before the business

commences. This is to minimise the risk of a future dispute between you and your business partner. Most partners know how the partnership will start and run on a day-to-day basis but never consider how the partnership will end.


Partnership of Individuals


This is the riskiest structure as it provides no asset protection in the event of business failure or legal dispute. For this reason, we generally do not recommend this structure.


If you are comfortable with your business risk profile and don't want the added protection, this structure may be appropriate.


Advantages

• Simple.

• Cheapest option to run from an accounting perspective.

• Can apply 50% Capital Gains Tax discount on sale of the business (if the business is owned for more than one year).

• Can apply the Capital Gains Tax Small Business Concessions (assuming all criteria is met).

• Commercial losses can be applied against employment and other income (assuming non-commercial loss provisions are satisfied).


Disadvantages

• Each partner is jointly and separately liable for the total liability of the business.

Depending on insurance, there is no protection to the partners in the event of business

failure and a legal dispute.

• Limited or no ability to distribute profits to family members or related entities.

• No asset protection. Your personal assets are exposed to business creditors.


Option Two


Company (owned by individuals or discretionary trusts)


This structure provides limited liability from business failure and legal disputes.

If you intend to sell the business then the company structure can be the most costly structure from a Capital Gains Tax perspective.


Advantages

• Limited liability.

• Ease of administering in the tax system.


Disadvantages

• Unable to apply the 50% Capital Gains Tax discount and difficulty in applying the Capital Gains Tax Small Business Concessions (in particular the 50% active asset discount). Therefore, each business partner can pay substantially more Capital Gains Tax on sale of the business in the future.

• If the company is owned by individuals, there is limited ability to distribute income to

family members.

• Business losses are quarantined in the company and cannot be distributed to beneficiaries (can only be applied against future profits made by the company).


Option Three


Unit Trust with corporate trustee ( owned by individuals or a discretionary trusts)


This is very similar to a Company structure however the Unit Trust provides better result for

Capital Gains Tax on sale of the business.


Advantages

• Limited liability (as there is because a corporate trustee).

• Can apply the 50% Capital Gains Tax discount (if the business is owned for more than

one year).


Disadvantages

• Difficulty in applying the Capital Gains Tax Small Business Concessions (similar to a

Company structure).

• If the Unit Trust is owned by individuals, there is limited ability to distribute to family

members.

• Can be more costly to run from an accounting perspective.

• In the event of business failure, the business partners are unable to lock in income tax

debt as part of a liquidation process.

• Accrued business losses are quarantined in the trust and cannot be distributed to

beneficiaries (can only be applied against future profits made by the trust).


Option Four


Partnership of Discretionary Trusts (with a corporate trustee)


This option is the most advantageous structure from a Capital Gains Tax and income tax distribution perspective.


Advantages

• Limited liability (as each partner would have a company as a trustee).

• Offers the most flexible ability to distribute profits to family members and other related

entities (depending on the trust deed and assuming the alienation of personal services

income provisions are satisfied).

• Ability to distribute profits to a company structure and build wealth at the company tax

rate and on-lend funds to related entities (depending on the trust deed and assuming the alienation of personal services income provisions are satisfied).

• Can apply the 50% Capital Gains tax discount (if the business is owned for more than one year).

• Most effective structure to apply the Capital Gains Tax Small Business Concessions.


Disadvantages

• In the event of business failure, the business partners are unable to lock up income tax

debt as part of a liquidation process.

• Accrued business losses are quarantined in the trust and cannot be distributed to

beneficiaries (can only be applied against future profits made by the trust).


We recommend that you very carefully weigh up your options and choose the business structure that is right for you and your business partnership.


If you would like to discuss your new or current business structure or need advice on how to change your business structure please get in touch.


We are proud to represent our clients' interests and would be proud to be your lawyers.


You can learn more about us and our services by visiting our website www.adeptlegal.com.au.


If we can ever be of assistance to you about any legal matter whatsoever, please do not hesitate to contact us on (07) 5578 7014 or brendan@adeptlegal.com.au.


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