Structure… What structure?

How well do you really understand your business structure?

All too often we come across clients who have been operating their business within a particular legal structure for a period of time, and in some cases, many years, without having a proper understanding of the consequences and implications that their particular structure may have on their long term financial position.

All operating structures have their pros and cons, but it is imperative that you seek to understand the full array of issues and how they apply to your circumstances before commencing operation of a business.  It is equally important to regularly review your business structure to ensure it is still suitable and relevant and that there are no nasty surprises brewing.

In this article I will focus on discretionary trusts and companies and try to highlight some of the more common issues that may be overlooked, emphasising the importance of seeking good wholistic advice when it comes to your business and financial affairs.

DISCRETIONARY TRUSTS

I find the Discretionary, or Family Trust to be one structure that is very popular but also fraught with potential issues. The flexibility, income splitting ability and potential asset protection benefits that can be achieved through the use of a discretionary trust are well documented and are quite often the major reasons why clients are ushered into or choose to operate within this particular structure.

Unfortunately though, the laws surrounding the operation and taxation of discretionary trusts are very complex and without professional advice and constant review can result in some serious long term consequences.  Following are a couple of key points to consider:

Firstly, I would suggest that it is critical that you discuss your Trust Deed with your adviser and understand the rules around the operation and control of your Trust. These rules and contraventions of them will have serious taxation, succession and estate planning implications.

It is also essential that you give proper thought to the distribution of income and capital from your trust each year. Creating beneficiary entitlements through distributions. results in legally binding liabilities for your Trust. Therefore, proper thought and care (above and beyond the taxation implications) should be given to how much and to whom you distribute each year, to prevent unintended outcomes and conflicts in the future.

COMPANIES

The private company is another popular structure when it comes to operating a small business and can provide legal and taxation benefits. Used in the right circumstances they are a very effective operating structure. Like discretionary trusts though, the laws around the operation and taxation of companies are quite complex.

If you are operating a company, first and foremost, you should ensure that you know your obligations and responsibilities as a director of the company. Even if you have no management control of the company, having a position as a director comes with significant responsibilities and can have serious implications for you personally. If you are unsure you should discuss this issue with your adviser.

The other major issue I often see with family operated companies is shareholder access to company funds. Most, if not all of the benefits of operating through a company can quickly be undone if shareholders are constantly accessing company funds through loans or payments to themselves.

Without constant monitoring and professional advice in how to deal with these circumstances there can be dire taxation consequences for shareholders of the company and I would strongly recommend seeking professional advice and considering your full circumstances before choosing a company structure for your business.

These few issues are just the tip of the iceberg when it comes to understanding and considering your business structure and I have seen many horror stories over the years from these types of issues being left unchecked. I highly recommend that you undertake regular reviews of your business structure with your adviser and make the effort to really understand and be comfortable with your own personal circumstances.

Danny Horan

Partner – Business Advisory

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