In this session of Quick Tips, we’ll talk about business structure; the different types and the top two things to look into when you’re considering whether or not your business structure is correct today and for where your business might be into the future.
- Types of Business Structures
- Company vs Trust Structures – what’s the difference?
- Two things to consider
Hi, it’s Joanna Oakey here and welcome back to Talking Law. Today, we have another one of our Quick Tips episodes. Our Quick Tips episodes are all about providing you with the high level information you need to understand about a particular topic in the shortest period of time possible. We’re aiming for 5 to 10 minutes. So if you haven’t got much time, you can flick through and find the quick tips that are relevant to the areas of law that you’re considering today.
In today’s session of Quick Tips, we are talking about structure. How to choose the best structure for your business and how to evaluate that choice on a regular basis.
I would recommend that you re-evaluate the structure of your business on at least an annual basis to ensure that the business structure that you’re using today is the right business structure for where your business currently sits.
Types of Business Structures
In a very simple, short manner I’ll quickly explain the different types of business structures that you can have in place and then the considerations that you should be going through each year to ensure that that structure is the right fit for you where your business is today.
The different types of structures are generally companies and trust structures. But organizations sometimes also adopt the structures of sole trader and partnership. We’re not going to talk much about sole traders and partnerships. We’re going to focus mostly on the areas of companies and trusts.
But suffice to say if you are engaged in a business that in which you are a sole trader or which you are in a partnership based on your own personal capacity (i.e. you don’t have a company or a trust interlaid somehow in that partnership), you need to be aware about the risk from that business model comes right back to you personally and your personal assets.
So usually, if you’re in either of those types of entities, when you hit a particular milestone in your business from an economic or risk perspective, you should be looking to move as quickly as possible into either a company or a trust structure.
Most of our clients and our listeners are likely to be in company and trust structures or a combination of the two. Let’s look at what the elements are that are different between these two different types of structures.
Company vs Trust Structures – what’s the difference?
A company is a very simple type of structure to understand within Australia and it’s a favoured type of vehicle within Australia. If you’re looking at doing things that require flexibility into the future (i.e. bringing other shareholders on board or perhaps dealing in an ongoing way with equity in the business), sometimes companies can be the best structure to look at. And certainly, if you want to keep them simple, company structures provide that as well.
Trust structures, on the other hand, can be a great vehicle for helping to increase the flexibility in income distribution if someone who has beneficial ownership of an organisation has other people within their family or extended unit who are on lower tax rates that they can distribute to. They can also be a great vehicle if you were looking for flexibility particularly if you’re looking to sell the business into the future.
Two things to consider
There are different levels of risk protection and income distribution advantages of both of these structures. And what the right structure is for you and your business depends on your approach to risk mitigation and how much risk is sitting in your organisation and income distribution.
These are the top two considerations when you’re considering whether or not your business structure is correct today and for where your business might be into the future. That’s asset protection and income distribution or tax minimisation.
Now if you are already in a company or trust structure, the next elements that you should be reviewing each year are whether or not the number of entities that you have within your corporate group are the ideal number for where you sit at the moment.
Some organizations we see have a far greater complexity in the level of structure (i.e. the number of entities that they have and are dealing with that is necessary for the type of business that they’re dealing in). And some organizations that we look at are perhaps structured too simply (i.e. they haven’t been able to take advantage of some opportunities that might be sitting there if they were to separate out different areas of their business.)
Once again the considerations when you’re looking at whether or not you have the right number of entities within your corporate group are:
- Whether or not the assets within any one of those entities are properly protected or are they overly exposed to liabilities that might sit within the same entity
- Is there the highest degree of income distribution flexibility that is required for the structure that you’re involved in at the moment
That’s it for our Quick Tips today in relation to the area of structure. Obviously, we have only just scratched the surface in relation to how to decide whether or not the structure that your business is adopting today is the right structure for you now and moving forward into the future.
Because you need to consider not only the essential elements that we talked about, which is asset protection and income distribution right now, you also need to think about how these elements will apply to the structure that you have in place into the future.
If you would like more information about this area, pop over to our website at talkinglaw.com.au. There you can organise to speak to one of our lawyers at Aspect Legal or simply send us a note to let us know that you’re interested in this topic in which case we will record an episode that is specifically all about the structure choice for your organisation and whether or not you need to migrate to a different type of structure. So once again that website is talkinglaw.com.au.
And finally, if you enjoyed what you heard today, please pop over to iTunes and leave us a review. Thanks again for listening in to today’s Quick Tips on Talking Law. You’ve been listening to Joanna Oakey. See you next time!