Company V Trust

We are looking at taking over a small business.

I'm just started reading up on business structures and obviously need to choose one that provides personal asset protection such as a company or trust.

Would the advice on business structure vary if you knew one was a property investor?

E.g. Paul is looking to buy a small business. He has no desire to invest in property.

Sally is looking to buy a small business. She already has 3 properties in her name and hopes to buy more in future.

Thanks.

 

Asset protection (assuming it is just you and no unrelated parties):
- either a discretionary trust with corp trustee;
- a company with shares held by discretionary trust; or
- a unit trust with corp trustee with units held by discretionary trust.


Which one of above suits best for small business CGT, tax planning across all your entities etc. is the more complex question.

 

ahh a small business owner. we just had this discussion and yes one of the lucky ones for structuring. this is regards tax not any legal issues here

look at companies first as they get tax benefits if an SBE (small business entity aggregated turnover less than $10m) 27.5% compared to 30%.

shares in company held by a trust for tax flexibility. dividends can be paid down to the trust and streamed tax effectively.

 

The decision on how to structure a business will have a long term impact on the success and legacy of the business and the family.

A clear understanding of each families goals and objectives is essential before you can give advice on how to proceed.

So if a family was passionate about doing lots of property developments on the side then this would affect how you structured the acquisition of the business.

Don't forget to do a proper due diligence with the business purchase.

 

It's the family business and will be taking over from the parents. I will have a good read of your posts and come back with any questions.

I need to make sure we get this right from the start obviously

 

Think of the legal side as well as tax. Might be better for parents to sell to a new entity and get small business concessions. Multiple entities perhaps so added asset protection. Assets used in business could be held separately to trading entity

 

How do I go about finding the right accountant for this? Do i look for someone who specializes in small business or trades or property? As in, do i need specialist advice or should any accountant be able to do this?

Thanks so much, as always.

 

@Jasper a few of us on here that would be worth chatting to.

As @Ross Forrester says if you are looking into development activities later on a company with another company holdings shares in Company A might be a better option

Can stream dividends to Company B from Company A. no additional tax

Company B can then onlend funds to development company. No division 7a issues.

Good protection for funds held as cash. Retained profits cleared out to Company B to protect cash reserves.

Company B acts as a bank for development activities.

 

We use this model for one of our trading entities. Great flexibility.

 

Wow. Lots for me to digest.

Perhaps I should focus on this part first. The parents have had the business formally valued at $400k. It's been loosely advertised without much interest.

We would like to take on about 60% of the existing contracts and buy that part. The parents say they don't want any money if we are the buyers. They owe us long service leave and have suggested that could be the payment? But we'd like to give them something.

What implications do I need to be aware of if we:
A) pay nothing for a business
B) pay under market value for a business
C) what do we offer? The business isn't worth $400k as the market dictates the price and no one is interested at that price. We only want a portion of the business.

Thanks. Your time is greatly appreciated

 

Surely you don't expect legal advice on the forum?

There are too many things to consider. one example is asset protection you and them. An umdermarket value transaction. opportunites for loans, gifts and borrow backs, estate planning on death.

It may be better to buy the whole business for $400k, borrow to buy it at full market value, they might then make an interest free loan to you and secure this with a charge and a mortgage. They could then set up a testamentary trust will - which you must repay at their death and could then borrow back at full interest perhaps.

It will all depend on your circumstances.

 

your parents will need to consider the small business CGT concessions.

transferring the business whether it be for consideration or nil will require the market value substitution rule and they will need to account for CGT on the sale. concessions may well bring the gain to nil

also be very careful only taking over part of the business. they may be subject to GST if they try to apply the going concern exemption and ALL things necessary are not supplied.

 

Trading and development must be kep seperate and

Legal and tax advice time.

 

Thanks everyone.

This is great as I've now learnt that I need to see a lawyer as well as an accountant. I like to discuss via a forum so that I'm learning and digesting before meeting with the experts
Otherwise I feel overwhelmed when I'm starting from zero knowledge and I don't ask the right questions at the time.

Which do I start with? Accountant or Lawyer Or does it not matter?

 

It depends how good the lawyer is on tax.

I have attached our developer toolkit which explains a lot of fundamental tax issues which may help save time and allow more informed questions

 

Start with @Terry_w he can advise on both legal issues as well as tax issues. He should be able to answer most of the questions

 

Finally met with an accountant. He said a company would be the most straight forward process for owning the small business. I asked about property investment and mentioned trusts. He said the government may tax trusts like a company eventually (but that may never happen!). I want to be 100% sure in my decision.

STRUCTURE:
We already have two investment properties in our own names and a third waiting for land to title next year.
Q: Can anyone explain what type of properties are best owned in a trust structure (e.g. ones that will be positively geared? or?)?

BUYING BUSINESS OFF PARENTS:
He said we can offer the parents a lump sum or % of profits going forward. We think a lump sum is easiest. We could borrow from a bank to pay them the lump sum, or pay it to them in installments
Q: If we borrow from the bank (say $100k), does this diminish our borrowing capacity for property investment?

Thanks for your time.

 

If trusts are to be taxed like a company then there is no adverse outcome using a trust for income tax purposes.

IMO there could be benefits of such a proposal.

 

If this business is a trading entity, keep it separate from your properties which are assets with enough protection to have them out of reach from one another.

Consider both legal and tax implications, but do not constraints yourself with the current solution. It might be an option to transfer your properties into a family trust with corporate trustee - you would have to eat up stamp duty most likely, but this could make the structure holding the trading entity much simpler. Best for advise is to find one accountant and one solicitor who also do property investment themselves.

 

What did your lawyer say?

A: It depends.

A: yes.