It’s all about the structure, should I be trading in a company and not a trust?

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Don’t let it crumble from underneath you

Trusts used to be the structure of choice for many small businesses. But many changes in the “interpretation” and “application” of the trust laws and the way in which profits are distributed have meant they are not as useful or flexible for small business. And with Government tax breaks, and a definite preference by the ATO of company structures, many businesses have been restructuring. As a business owner you should be proactively reviewing your structure to ensure it is the most appropriate for your business operations and future succession plans.

When the choice is made to incorporate, there are many decisions to be considered. The days of owning your company directly are long gone and the structures put in place today are often complex, and driven by flexibility and tax-planning considerations. Clearly, careful attention is warranted to ensure your company structure is effective both now and in the future.

Very often business owners opt for direct ownership models. This can be an effective strategy when there are one or few shareholders, the company wealth accumulation is not anticipated to be substantial, and there is little opportunity for income splitting. It is always important to bear in mind, however, that situations change. Individuals who never thought they would get married end up with families of five and suddenly the logistics that went into the organisational structure are very different. In this case keeping things flexible is the key to long term planning.

When incorporating a company, be mindful of who owns what shares. There are ways of meeting the goals of creditor-proofing the equity of the business and potentially accessing the small business concessions for any potential sale in the future.

While family trusts may no longer be the preferred trading entity, they have increasingly become a popular tool in the game of corporate structuring as the shareholder of the trading company. The benefits can be extensive. For example:

  • The beneficiaries of a family trust can be anyone, not just spouses and children;
  • Flexibility where the company may or may not declare dividends which flow to the family trust;
  • A family trust allows for total flexibility in the income allocation for any dividends received from the operating company, the trustees have complete discretion when it comes to deciding who gets what, if anything, on an annual basis.
  • There are capital gains taxes planning opportunities by allocating the capital gain on the sale of the trading company shares to numerous beneficiaries.

Every business structure is unique based on the personal situation of the owners, and the options out there are endless. The key is to do a proper analysis of the situation beforehand and ensure the various options are given careful consideration. Professional advice from an accountant is an investment that will pay off in the long run, literally, when it comes to the tax savings that can be achieved through effective planning. Lastly, it’s never too late. Corporate restructuring is very commonplace, so if the strategy wasn’t there in the beginning, there’s still time to take advantage of the options available.

Any further questions? Please contact SMART Business Solutions on 0359 11 7000 or reception@smartbusinesssolutions.com.au

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