Your business is one of your most precious assets, which we at Fred Kalouche & Associates can help you protect by properly structuring it to benefit you and those you care about, including your family and any employees. Ideally, you should seek our expert legal advice before a business is established to save you money in the long run.
There are two main ways to structure your business: either as a sole trader or as a trading entity or discretionary/unit trust with a corporate trustee (corporate structure). Perhaps the starkest difference between the two is that you are personally liable for debts and actions as a sole trader, which puts your personal assets, such as your home, car or investment properties, at risk. For this reason, many business proprietors choose to operate under a corporate structure. The latter has several financial benefits and advantages:
- Limited liability – A company is only liable to its trading partners and credits for the value of its assets or shares. The director is not personally liable unless the company trades whilst it is insolvent or the director has given a personal guarantee on the company’s behalf. However, recent legislative amendments have increased the Personal Liability of Directors to the extent that they are personally liable for outstanding superannuation contributions and PAYG tax relating to the company’s employers.
- Reduction in tax – A corporate structure offers flexibility in relation to distribution of income. There is also the ability to pay franked dividends throught he company and limit the tax payable to the corporate rate (30%).
- Limited exposure to litigation as all contracts are with the company – Providing the company director has given no personal guarantees, all contracts entered into will be in the name of the company, which means any actions brought are against the company, not the business proprietors. This means if the company is sued for a large sum, the successful party can only extract the value of the company’s shares. By contrast, any contracts entered into by a sole trader or husband and wife partnerships are in their name, attracting personal liability.
- Company trusts don’t “die” – If the company director dies, the company continues to operate. A new director must be appointed to take the deceased director’s place. The same applies to a trust. It is vital, however, that the Will of the deceased business proprietor includes appropriate measures for a smooth transition, known as Modern Estate Planning or Succession Planning. The proprietor’s personal and business affairs should be structured in harmony so as not to adversely impact beneficiaries. It also helps to keep corporate entities running whilst providing for asset protection and the effective distribution of superannuation death benefits. This is often achieved through incorporating a Testamentary Trust into a will. Modern Estate Planning can also assist in the equalisation of an estate, where non-assets, such as life insurance and superannuation payouts, are balanced with other estate assets. Powers of Attorney also come into play if a director of a company is incapacitated, making it even more crucial for business proprietors to have a will that includes these provisions.
It’s important to keep any valuable business assets in a separate entity, not held by your trading entity, so that you still have the tools of the trade to continue operating, should the trading entity fail. Any factory, office or property should also be safeguarded in this way.
If you opt to implement a corporate structure to lower the risk of being personally sued, ensure you consider the impact a dispute between co-owners of the death of a co-owner could have on your business. Such disputes can be managed or avoided by implementing a Buy/Sell Agreement, which outlines the process of events such as the retirement, death or permanent disablement or serious injury/trauma to one of the business owners and often involves an obligation to fund any purchase price by way of a company or proprietors’ insurance policy; or a Shareholders Agreement – a form of partnership agreement between business proprietors that sets out the agreement with respect to the management and control of the business and each co-owner’s responsibilities, as well as their rights and obligations in the event of a dispute of proposed sale of part or all of the business.
Contact us on (02) 8062 6300 for a risk assessment of your business or further legal advice concerning business structuring and asset protection.