Business structure for broker partnership

Hi all,

I have a question to the brokers, planners, accountants, lawyers.

A colleague and I are both looking at starting a mortgage broking business together, in order to combine resources, marketing, aggregation synergies etc.
Currently we both operate under our own private companies as sole director/shareholders (eg. Tom Pty Ltd and Harry Pty Ltd).

Understand specific advice can't be given, but in general what would be the most effective way to structure the new business (trust vs company vs partnership vs combo) in order to:
- Ensure each partner is distributed their fair share of upfront and trail comms, based on the deals they write.
- Allow the most tax effectiveness.
- Potentially allow future partners to buy into the brokerage.
- Allow potential to grow in the future and put on salaried loan writers
- Allow a partner to exit the business and sell their share (This also poses the question of who "owns" each partner's loan book - owned individually or as a collective of the new business?).

I've been reading this thread from the old SS:
Bog standard company/trust structure in 2014? - Somersoft Property Investment Forums
However, the circumstances are different because it involves 2 different families, rather than the typical husband and wife scenario when this question is asked on forums.

After reading the SS thread, some potential suggestions so far have been:
- Create a discretionary trust as the trading entity and have Tom Pty Ltd and Harry Pty Ltd as beneficiaries, aggregator pays income into Trust and trust distributes income based on deals written.
- Form a new private company (New company Pty Ltd) with a Trust as a shareholder. New company Pty Ltd pays dividends to the trust. Trust distributes to Tom Pty Ltd and Harry Pty Ltd based on their deals.
- Or would it be better do away with Tom Pty Ltd and Harry Pty Ltd altogether and simply have each individual as direct beneficiaries. Note: salaries won't be paid in the early years - just income earned writing loans.

We will be getting professional advice from an accountant, but would love to get the general opinion of the PC community, as I'm sure many of the finance professionals have possibly come across this over the years, dealing with any partnerships of commission book-based businesses, eg. mortgage/stock/insurance brokers, etc.

Thanks for reading.

 

Not a DT as there are no fixed entitlements. Partners cannot sell their 'shares'.
Not a company with one DT owning the shares. A DT is discretionary by definition.

You need fixed entitlements. A company is usually the way to go with each party's shares owned by a separate DT.

You need legal advice on the above plus tax advice from a tax agent.

 

Thanks Terry. In your general opinion, what would be the method for upfront and trail to be distributed to each party based on loans written? Would it be as wages? Director's fees?

From what I understand, due to fixed entitlement it would not be as dividends to the trust as this would be determined by the share percentage, rather than loans written.

 

Each of your existing companies could contract with the trading company and there could be a formula to work out how much each receive as commissions.

 

I would not be using a discretionary trust for non related parties.

 

This post gave me like 5 alerts

 

Just say no to DT

 

There is a way to use a Disc Trust with fixed entitlements. Its a class disc trust. It has limits. No new parties can be bought in. It basically reflects a unit trust with fixes entitlements that flow in a discretionary capacity. Problems with control etc.

The alternative may be a unit trust limited to 20. Each unitholder could be a disc trust etc.

Loads of alternatives and what works for one wont work for another partner. It could be that the structure has a PSI issue or that the respective partners could end up becoming joint & severally liable. A company may be best to address this.

Key issue will involve a agreement on valuation of entries and exits.

 

Or a service trust arrangement where all parties equally support a joint services office with costs shared etc but have own share of income etc.

 

I am a fan of this sort of arrangement. You are effectively running your own business still, but sharing overheads and marketing etc. Service Trust invoices each of the companies for services provided. If someone else comes in then it is not a new partnership, as each of you still trade individually.

 

Thanks for everyone's tips so far.

We had a meeting with our accoutant, and they mentioned the objectives outlined could possibly be achieved by using possibly the following:

- Hybrid Trust - allowing fixed entitlement, but also allow discretionary income distribution.

- A private company with different classes of shares (eg. Class A and Class B) where different income could be paid as dividends to the different shareholders.

What is everyone's thoughts on the above?

 

Sounds messy.

How will you define the fixed entitlement?

 

I like the service trust arrangement which you each contribute a small amount and then you each get your own incomes after this.