EFFECTIVE TAX STRUCTURES
For established and growing allied health businesses it is likely you will outgrow a sole proprietor, or individual partnership business/tax structure and start looking at a more sophisticated structure that can be established for both asset protection and taxation purposes.
We will discuss the following business/tax structures in more detail below:
- a family trust
- a partnership of family trusts
- a unit trust, and
- a private company
A family trust is also known as a discretionary trust. It is a fantastic structure for a single family business. Its main benefit for business is the ability to distribute the income earned from the trust, in any way the trustee sees fit, provided it complies with the trust deed. A family trust also offers asset protection both for the family members and the business. If a family member is sued personally, the assets of the business are protected, and vice versa.
There are also opportunities to pass the business down to a younger generation without capital gains tax and the ability to access capital gains tax discounts on the sale of your business, or its assets, that are not available to all other entities.
Partnership of Family Trusts
For a business that involves more than one family, a Partnership of Family Trusts is a sophisticated and well balanced structure. In this structure two family trusts, for the two partners, are empowered to operate by two trustee companies respectively. It’s important to have brand new trusts and companies for this structure for asset protection purposes. This is a Partnership so it will be administered under Partnership Law meaning there is joint liability for the trusts running the business. If the business fails, for whatever reason, and interested parties start chasing monies or claims outstanding to them, they are allowed to look at the assets in each trust to recover their claim. As a result we recommend these trusts deal with the business only and no private investment assets should be bought in these trusts.
For operational simplicity a Company Manager will often run the business on behalf of the Partnership of trusts. So there is a fair bit of setup cost and complexity for business owners who identify that complicating your business life with trusts means being better protected and minimising your tax.
A Partnership of Trusts has one major advantage over it’s competitor structures, and that is it will likely yield the easiest and least cost route to eventually selling your business potentially tax free. This will need to be explained in detail and in person, so please talk to Pat about a meeting to discuss this.
A Unit Trust is also a popular structure for partners in business together. It is easier to understand and has fewer adjustments required, in comparison to a partnership of family trusts, when partners exit or new partners are added to the business. With a Unit Trust, the partners hold a fixed number of units and so they receive a fixed proportion of income per year and this is set out in the trust deed. Once again the Unit trust should have a Trustee Company to operate it for asset protection purposes and usually the units are held by a family trust of each partner. Unlike a Partnership of family trusts, the most advantageous structure to sell a business from, partners trading under a unit trust structure will be best served by selling the units trust to incoming owners. The difficulty with this is that buyers will usually want to buy your business but not your structure.
If the buyer has their way and they buy the business then you the sellers will pay more capital gains tax than the business owner selling their business under a Partnership of family trusts structure. This is a simpler structure, less costly to setup, but not as flexible and not as tax effective from a capital gains tax view point.
A Private Company is another structure that you may choose to run your business from. This is the simplest business structure of the possibilities described above because the entity is taxed for its yearly income before there are distributions to the Partners or owners. This is easily understood but the major problem with the private company structure is that if you cannot sell the shares in your company when you are selling your business you will pay substantially more capital gains tax than the Partnership of Family Trusts.
There are a number of factors that will affect your decision on the appropriate business/tax structure so you will need to contact Pat to consult on which one is best for your circumstances. In particular there have been a number of changes to trusts recently that will require this specialist advice for your business.