Commercial Law

Company, family trust, partnership?

If you earn your living in business, it’s worth reviewing your chosen business structure from time to time to ensure it still meets your needs.

Conducting your business as a sole trader or in partnership may be a reasonable choice depending on the nature of your business or trade and several other factors. The major downside is that you have unlimited personal liability for events in your business causing significant loss or injury to workers, bystanders or customers. Adequate insurance can reduce the practical risks flowing from personal liability, but so too can a business restructure whereby the business is conducted by a company owned and directed by family members. That way the limit of your personal liability is the unpaid face value of the shares you own (typically $1 per share).

As an alternative, you might consider having your business conducted by a family-controlled company which also acts as trustee of your discretionary or family trust. Usually all close family members are potential beneficiaries of the family trust, but its controller decides who should receive profit distributions at the end of each financial year and in what shares.

That flexibility can achieve significant tax savings in some families, but only where you can confidently anticipate that one or more close family members will be studying full-time or not undertaking significant paid work for some other reason, therefore having their earnings taxed at a significantly lower rate than the primary income earner. If that isn’t the case then tax savings are likely to be minimal, while the complexity of such a structure generates some additional costs.

In many situations you can achieve a similar tax saving, at least in the immediate term, by retaining earnings within the company to fund future expansion and ongoing operations. If you don’t distribute profits to shareholders then those profits are not taxed in their hands as they would be if a dividend was paid, although those shareholders also won’t get a franking credit from those shares to compensate for the company tax that has already been paid.

Other more complex structures such as unit or fixed trusts, and joint venture agreements for one-off projects to be conducted with unrelated people or companies may also be relevant depending on your circumstances.

One aspect of business structures that many lawyers and accountants may overlook is the need for a shareholders’ or unit holders’ agreement to define clearly the rights and obligations of participants between themselves. Questions such as:

• the extent of any obligations to loan funds to the company to bankroll its operations and/or expansion;

• whether and to what extent loans should bear interest and at what rate; and

• buy out procedures when a participant is leaving the business for whatever reason (especially detailed specified procedures governing the valuation of an outgoing participant’s share of the business),

are all key aspects of a well-drafted shareholders’ agreement. We have seen numerous cases in the past where a well-run and profitable business ends up breaking apart in acrimonious squabbling, at least in part because they didn’t have a shareholders’ agreement to manage expectations and entitlements between participants.

Choosing an appropriate business structure for your family business is certainly not a “one size fits all” exercise. Kelly & Partners lawyers have been assisting clients with these issues for more than 35 years. We take the time to analyse your business situation carefully, usually in conjunction with your accountant. We then create the most appropriate structure for your business and carefully explain how it needs to be conducted to reduce problems that can arise if you just carry on running the business as if it was still in your personal name.

Even in today’s “dog-eat-dog” business world, we are frequently astonished how many small businesspeople (and sometimes those running larger businesses) undertake quite large business deals on a handshake basis, without getting the terms and conditions of the deal formally spelled out by a lawyer in a deed or agreement. Either they see themselves as infallible judges of human character, or they think paying legal fees to have a lawyer document the deal is a waste of their hard-earned money.

In fact, many deals, transactions and projects go wrong. Having the deal legally documented won’t necessarily stop a project or transaction running off the rails, but it will usually at least ensure that the costs and time involved in sorting out any dispute are minimised. Moreover, the exercise of going through the deal in detail with your lawyer, especially discussing “what if this happens …” “what if that happens …” etc CAN actually assist you to uncover potentially problematic aspects that you will need to guard against.

At Kelly & Partners we can help by drafting agreements governing the conduct of just about any business, project or transaction you can think of, including mining and pastoral ventures; fishing businesses; hotels, restaurants or cafes and many others. We can also document securities like mortgages or debenture charges to safeguard your business position, especially in volatile businesses where income and expenses will predictably be variable, and those involving a high risk factor e.g. building and construction businesses notoriously go through boom and bust cycles and the consequences of a serious workplace accident can be catastrophic.