Barry van Heerden, Attwood Marshall Lawyers’ Special Counsel for Business and Commercial Law, explores the different structures available for your family or small business.
Operating a family business involves riding the highs and lows of the commercial world along with the added pressure of that business being the cornerstone of your family’s livelihood. With so much on the line, you need to make sure the entity you use to conduct the business is the most suitable.
Whether you are at the start of the process of setting up or buying a family business or feeling the need to review if your existing structure still works for you, it’s best to be aware of the main differentiators between the structures available.
You may decide to share the control and management of the business via a partnership or run it on your own, employing staff as a sole trader. Alternatively, you could take the more complex route of setting up a company or trust. There are advantages and disadvantages for each type of business structure and deciding what is best for your business will come down to your unique circumstances and plans for the business.
Importantly, each of these four business structures has different legal, tax and reporting obligations business owners must be aware of. You should always obtain legal advice from a lawyer experienced in this complex area of law and make sure you receive advice from your accountant before deciding on which entity is the right structure for you and your family. Sometimes lawyers and accountants look at these issues from different perspectives and it can be beneficial if your lawyer and accountant discuss these issues with you.
The simplest business structure is that of the sole trader – i.e., when an individual runs a business. A sole trader has only one owner and they manage the business in their own personal capacity, making them responsible for all aspects of the business.
Setting up a sole trader structure entails fewer costs and generally means less paperwork.
However, the owner is personally liable for any debts or losses incurred by the business, which means there is no separating business assets and personal assets. The assets in the owner’s name can be at risk to pay business debts.
Insurance will also need to be considered, depending on what kind of work the business undertakes. When a sole trader employs staff, they must get to grips with workers’ compensation insurance as well as tax and superannuation obligations and other employee entitlements.
A partnership involves two or more people who run a business and share the business’s income and losses.
Like a sole trader structure, a partnership is relatively inexpensive to set up and operate. The partners are also all personally liable for the debts and obligations of the business jointly and severally. This means a creditor may pick and choose from which partner he wants to claim.
Though not essential, it is highly recommended the partners enter a formal, legally enforceable Partnership Agreement. Such an agreement should set out the equity that each partner holds in the business, as well as what should happen in case one partner wish to exit the business.
The agreement also establishes a dispute resolution process that can be followed if disputes arise between partners. Having the proper mechanisms in place to resolve disputes when they arise can reduce the risk of such disputes escalating and resulting in costly litigation to resolve.
These are just a summary of some of the issues covered in a Partnership Agreement, however. An agreement should be tailored to suit the unique needs of the business and its partners to cover all necessary issues.
Setting up and running your business as a company is a more complex process than choosing a sole trader or partnership structure.
The main differentiator is that a company is a separate legal entity from its owners, so it can launch legal proceedings or be sued independently.
In addition, the owners of a company are shareholders, who may appoint directors to manage the company. There are limited circumstances in which directors may be held personally liable and all potential directors should be aware of these circumstances.
As with partnerships, a company needs to have certain agreements in place, underpinning the structure of the business and setting it up for success. A Shareholder’s Agreement is very similar to a partnership agreement and deals with day-to-day management, exit strategies and dispute resolutions.
In addition to a Shareholder’s Agreement (and Partnership Agreement) it is important to have a Buy/Sell Agreement in place. Briefly a Buy/Sell Agreement deals with circumstances where a partner or shareholder dies or become permanent disabled to continue in the business. It is a complex agreement and competent legal advice should be obtained.
Trusts are the most highly intricate of all the structures available to family businesses. With this structure, a trustee (which should be a company) carries out the business on behalf of the members of the trust, known as beneficiaries. The trustee is responsible for the management of the trust.
A formal trust deed must be drawn up to establish a trust, outlining how the trust will operate, who the Appointors are, who the beneficiaries are and the powers of the Trustee.
Businesses may want to use unit trusts or family trusts for their commercial arrangements. Units can be bought and sold like shares in a company, and a trust can be controlled by a family group.
There are several benefits for having a family trust, including assets being protected from creditors, the option to transfer assets from generation to generation, and fewer regulatory requirements compared to companies.
Despite the benefits, there are also the risks to consider, such as tax disadvantages, complex requirements including the completion of annual tax returns that may require professional advice from legal professionals, accountants and financial planners. If the trustee is an individual, they can also be held personally liable for trust debts in limited circumstances hence our advice the Trustee must be a company.
Business succession and need to review
A business structure lays down the foundations for how a trading business operates. It can dictate who oversees important business decisions, which tax arrangements a business should take advantage of, and how profits and losses should be shared.
For family businesses, the development of a succession plan is a must. Often, power is vested at the very top of the staff hierarchy, with the business owner making all the strategic decisions. It’s important for those leaders to take stock of their wishes for when the time comes to hand over the baton – and put those plans in writing.
It may be prudent to also run a checklist for making sure that the structure that was initially chosen still works for the business.
Attwood Marshall Lawyers – helping set business up for success
Attwood Marshall Lawyers has a dedicated team of experienced commercial lawyers who practice exclusively in Business and Commercial Law. Our team can give trusted and appropriate advice on which structure is the right fit for your business. We can show you how to take advantage of an effective but uncomplicated business structure, and help you run a health check on your existing model to make sure you’re reaping the most benefits you possibly can.
To obtain professional advice regarding property and commercial matters, contact us any time on 1800 621 071 or speak to our Business and Commercial Department Manager, Jess Kimpton, on direct line 07 5506 8214 or email email@example.com. We’re here to help!