Company vs Trust with Bucket Company

Hi all,

I am a small business owner and am currently operating as a partnership with my wife. It is my sole income and my wife has a PAYG income on top. I would like to incorporate the business, mainly for asset protection purposes but I want to ensure I have the right structure going forward. The main goals are

Business Goals:
- Separate business assets from personal assets
- Continue to operate the business as tax-effectively as possible.
- Utilise the profits of the business to help contribute to personal wealth goals (property, shares etc.) as currently, I am near my limit in terms of serviceability.

Personal Goals:
- Continue to grow the business and use the business profits to generate personal wealth.
- Currently have a portfolio of 3 properties, looking to help pay down debt and grow the portfolio further. Potentially I am looking to sell 1 property to capitalise on CGT concessions using the 6 year PPOR rule, and then use the equity and the reduced debt to borrow for further investing.

Right now, the business is on a pre-tax income of 160k that gets split between us two, so the tax benefit is marginal for now, however in terms of structure, I think my best options are Company Pty Ltd or Trust Structure.

In my head, I have this basic summary. Have I missed anything?

Company
Pros
- Asset protection
- Business can retain profits at corporate tax rates. Retained profits can be reinvested in business, or paid out at a later date to shareholders. Marginal tax rates to personal situation applies to dividends (less franking credits)

Cons
- Limited flexibility in how retained profits can be paid out. Basically, only through dividends based on # and units of shareholders. So if I wanted to pay one person more than another, I couldn't.
- Limited flexibility in terms of who profits can be paid out to.

Trust with Bucket Company
Pros
- Depending on how the trust deed is written up and who is classed as a beneficiary, wealth can be distributed better amongst multiple beneficiaries, including bucket companies. E.g. A scenario where this is good would be if I sell PPOR, incur CGT and therefore for that year, pay myself a smaller portion of the business' profits to reduce tax liability.
- Asset protection, same as company.
- Bucket company is used to hold retained profits (different to company only). Retained profits separate to business in the event of being sued.

Cons
- Business cannot keep retained profits. All profits must be paid out. Any ongoing investments can only be made with equity within the business or must be spent before EOFY.
- Possibly more complex to work with from a taxation point of view?

In summary
- Is the con of the business not being able to keep retained profits a real issue, or not really? What are the implications of this, or potential downside? Does it hurt the business?
- Does the extra cost of setting up the bucket company and trust justify the benefit for most businesses, or is a company an easier strategy to start with and then roll the business over into a trust further down the track.
- How does the above impact potential investment strategy from a personal wealth point of view?

 

Do you know how different share classes work?

 

No but I will do some reading now. I was going to lean on the accountant with assisting with this side of things, but we are yet to discuss in depth.

 

yes, heaps

 

Great, at least I have a start!

Unfortunately Terry, I don't think you were taking on new clients so I'm going down the education route first.

Who would you recommend I speak to regarding this? What are the potential items I have missed?

 

There are too many things to list.
One important one is that when a company is operating a business shares of that company can be sold or transferred while where a trust is running it - or even when holding assets - you can't transfer parts.

Say you wanted to bring on a 'partner' to selling 20% of the business. With a company you could just sell 20% of the shares.
With a trust you would have to sell 20% of the business.

There are periods when I get too busy to take on clients again, but these come and go. I usually take my signature down when too busy.