Get the Right Structure for your Business
1. Dangers of operating as a sole trader or husband and wife partnership
When people start up their own business, they normally operate either as a sole trader or as a husband and wife partnership. Although a partnership allows the income from the business to be split between the partners and has some tax advantages, the biggest downside is the personal liability of the sole trader or the partners in the partnership in the event of the business being sued or running into trouble financially. If either of these circumstances occur (bear in mind 80% of new businesses fail in the first 12 months), your personal assets are then at risk of being lost to the people or companies who are suing you.
The other disadvantage of acting as a sole trader or a partnership is that if the business does make plenty of money, you are restricted in how you can distribute this income or profit. The end result is you pay more tax!
2. Advantages of a corporate business entity and trading trust
A simple and relatively inexpensive solution to the shortcomings of a sole trader or partnership is to establish a sole director corporate trustee and a simple Discretionary Trust sitting below that entity. In a husband and wife situation, the husband becomes the sole director of the company that is used to run his business (which eliminates the wife from any potential liability in the business or in the company). A trust is set up as the vehicle to run the business. This enables the wife, children and other related family members or corporate beneficiaries to be listed as beneficiaries of the trust and monetary distributions can be made to the beneficiaries on income earned through the business.
There is also protection by operating through a company because it is the company that is entering into the contracts with other parties in the industry and trade creditors. If the company is sued by another party over a contract dispute, the company is the legal entity that enters into the contract with the other party and it is therefore the party that will be sued. It would only be in exceptional circumstances that the director would be sued personally. Likewise, if the company is owed money and is chased by creditors, unless there have been personal guarantees provided, the director is not liable for those debts unless the company has traded whilst it was insolvent.
If a trust is used as opposed to just simply a company, you also qualify for the 50% reduction in capital gains tax if the asset is owned after 12 months. With a straight out company you are not entitled to this CGT discount.
The only downside of this structure is its cost and the ongoing additional fees that you would incur through ASIC and your accountant. It is our recommendation business clients should consider utilising a structure such as this to limit their personal liability in business and take advantage of the flexibility with respect to distribution of profits and liability for taxation.
Looking for the experts in business and commercial law? Contact Commercial Lawyers, Attwood Marshall, and book your FREE, no obligation appointment.
You can call us on 1800 621 071 or use our Online Enquiry Form to send us your details.
With four offices conveniently located at Coolangatta | Robina | Brisbane | Kingscliff you can also visit an office near you.
Attwood Marshall Lawyers
Northern NSW & Gold Coast, Queensland – Coolangatta | Robina | Brisbane | Kingscliff
Commercial Lawyers, Business Lawyers, Commercial Law, Business Law