We see a lot of growing business running under a trading company.
Running a small growing business under a trading company is not ideal in our eyes. It’s not the end of the world if it’s structured correctly. However, we’d prefer the business to be in a trading trust.
But a trading company, if structured correctly, is something we can live with.
One thing we cannot live with is 50% shares in the trading company being delivered to the husband and wife.
This is an unmitigated disaster.
Why? If they have any sort of investment or ownership of a private investment in their own names, they have to drag money out of this company after paying the 27.5% or 30% tax. They then have to pay an extra 18% tax on every single dollar to pay off the loan in an investment in their own names.
Imagine they’ve got a couple of properties in an investment trust, and they want to pay off some loans for those properties. The only way to get money out of the business is to pay out a dividend via Mrs and Mr Smith. When they do that, they’re paying 48% tax.
Yep, 48%. It is 30% when the business made the money and another 18% when it comes out. Then they can go on and pay off loans in a trust.
That is a huge percentage.
Another disastrous element about this unmitigated disaster is the lack of protection.
If Mr and Mrs Smith are starting to grow the value of their business, the value of their shares in their own company is going up, up, up and up. It is creating a lot of value in their own names.
Good for their own private wealth? Yes. Good for asset protection? Absolutely not.
If something unfortunate happens and this company gets a lawsuit against it, Mrs Smith is at risk of losing everything. Her value, in her company, is all in her own name. If you’ve got growth in your own name and you’re a director of a company, you are at risk of losing the lot.
Trading under a trading company with your personal partner and a 50/50 share split is an unmitigated disaster. Not only are you paying significant amounts of tax, but there is no asset protection measures being enforced.
If you’ve got a growing business in this structure, you’ve got it wrong. Don’t worry. It can be solved. Just don’t live in denial.
Come and see Paris Financial, the small business tax champions, and we’ll get it right for you.