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  • Writer's pictureAnthony Cerantonio

Business Structures

Updated: Sep 9, 2019

SOLE TRADER

A sole trader carries on business as the only proprietor, either in his/her own name or under a business name, which must be registered by completing an Application for Registration of a Business Name.

Advantages

  • Simplest form of business structure

  • Owner retains full authority for all decisions

  • Owner keeps all profits and controls all assets

  • Start-up is relatively simple and inexpensive

  • Legal compliance is relatively minor; that is, no special laws apply as they do with partnerships and corporations

  • Business can be terminated with minimum cost and inconvenience


Disadvantages

  • Administrative and managerial expertise is restricted to competence and skills of the owner and salaried staff

  • Raising capital for expansion and development is more difficult Liability is unlimited and extends to personal assets of the owner including his/her share of the family home and other personally owned assets.

  • Ongoing growth of the business depends on proprietor entirely and on his/her continuing involvement (consequently, in times of injury or sickness, the business may be severely disrupted)


Tax Position

  • Individual Business Taxation Return must be completed annually showing gross assessable income, less allowable deductions and rebates

  • Tax is payable on Individual’s taxable income


 

PARTNERSHIP


Many small businesses that start out as sole traders, often find the need to take on partners so as to expand the business. A partnership is owned and operated by two or more people, these are the ‘partners’.


Advantages

  • Provides additional money (capital) or financial growth

  • Share profits or losses according to partnership agreement

  • Collectively and individually liable for any debts the partnership incurs

  • Unlimited liability


Disadvantages

  • Each partner is liable for the acts of every partner (an exemption applies if a partner has no authority to act for the partnership in a particular matter and the person with whom he/she is dealing either knows that the partner has no authority, or does not know that he/she is a partner)

  • Every partner is liable for all debts and obligations of the partnership incurred while he/she is a partner; even after death, the estate of a deceased partner is still liable \

  • Liability of each partner is unlimited and therefore, will extend to his/her residential home, investments and other personal assets

Tax Position

Many family businesses are operated as a partnership. If a partner dies or withdraws from the business, it may mean the business must be wound up. A partnership carries on business in the name of the partners or under a business name. There is no tax payable on the net profit of the partnership. However, the distribution of the profit to the partners is subject to income tax as part of their personal income.


 

COMPANY


There are two types of company structures: 1) Private companies and 2) Public companies. Both structures have much in common; they operate under the Corporations Law, management and control is exercised by a Board of Directors, and Ownership of the company is by shareholders (who have only limited liability for the debts of the company unless they have agreed to act as personal guarantors for such debts).


Profits

  • Profits, after tax, earned by the company are distributed to shareholders in the form of dividends;

  • Each shareholder receives dividends according to how many shares he/she owns;

  • A Board of Directors, who can be either shareholders or employed personnel, manages the affairs of the company.

Tax Position

  • A company taxation return must be completed each year showing gross assessable income, less allowable deductions and rebates;

  • Tax payable for companies that are base rate entities is 27.5%, if not, the tax rate is 30%;

  • A base rate entity is a company that both: - Has an aggregate turnover less than the aggregated turnover threshold; and - 80% or less of their assessable income is passive income.

 

FAMILY TRUST


A family trust is created when a person (called the settlor) makes a gift in favour of a trustee, who holds it on behalf of specified beneficiaries, upon trust, under the terms of a Deed of Settlement. Both Individuals and Private Companies can act as Trustees.


Trustee

  • The advantages of having a private company act as a trustee is that liability is limited to the assets of the trust;

  • The trustee of the trust is the legal owner of the trust property, whereas the beneficial ownership lies with the beneficiaries; for example, although the title of a particular property is in the name of a company, the real owners are the beneficiaries nominated in the Deed of Settlement.

Beneficiaries

  • Beneficiaries, being the persons nominated either by name or defined in the Deed of Settlement as beneficiaries, are the beneficial owners of the trust property;

  • The trustee can only distribute income or capital to such beneficiaries.


Settlor

  • The settlor is normally a close relative or friend of the family who desires to make a gift, normally $10 to $100, to nominated beneficiaries under the terms and conditions as set out in a Trust Deed;

  • The settlor appoints a trustee, either an individual or a company, to manage the trust fund in accordance with the Trust Deed;

  • After executing the Trust Deed as the settlor, he/she is not personally responsible for any claims or actions against the trust.


Appointor

  • The settlor also appoints an ‘Appointor’ whose powers include replacing the trustee nominated in the Trust Deed;

  • The Appointor is a person in whom the power of removal and appointment of trustees is vested, so great care should be taken in nominating the Appointor of a Discretionary Trust;

  • It is therefore extremely important that where husband and wife have an equal interest in the family business, both should be nominated as joint Appointors in the Deed of Settlement.

Trust Fund

  • Once established, the trustee can invest the trust fund in accordance with the trust deed, which normally has extremely wide powers; they can borrow, purchase or commence business, which is normally operated under the name of the trustee;

  • The trustee has a discretionary power to distribute trust profits to any beneficiary in whatever proportion of his/her choice with exception of a Unit Trust where the trustee is obliged to distribute the profits of the Unit Trust in accordance with the unit holding.


The Vesting Date

  • The vesting date is the last possible date that the trustee can distribute all the assets of the trust to the specified beneficiaries and ends the life of the trust.


Unit Trust

  • The major difference between a family discretionary trust and a unit trust is that with a discretionary trust the trustee normally has absolute discretion in nominating the beneficiaries who will receive a share of the net income of the trust;

  • Whereas with a unit trust, the trustee must distribute the net income to each unit holder in accordance with the number of units held at the date of distribution.

Joint Venture

  • The unit trust is commonly used when two or more individuals or families decide to enter into a joint venture, to commence or buy a business or property.

Trustee Minutes

  • Trustees are required to make and document trustee resolutions for the year ended 30 June of each year. The Trustee Minutes should include:

  • Date and place of the meeting;

  • Names of those present;

  • Confirmation that a quorum is present;

  • Confirmation that the trustee acts for the relevant trust o Names of eligible beneficiaries in accordance with the Trust Deed;

  • Confirmation of the net income of the trust;

  • Distribution of the net income of the trust to nominated beneficiaries;

  • The chairperson to instruct the Secretary to do all things as were necessary to give effect to the resolutions passed at the meeting;

  • Time and date the meeting closed;

  • Minutes to be signed by the chairperson as a true and correct record.

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