I am partnering with another developer to do a multi staged land subdivision. We both have our own structures with co's and trusts. For the purchasing and developing entity his accountant has said it should be a company, the shareholders in the co will be each of our seperate entities, for mine it will be a project management unit trust. The issue is, my accountant is saying its crazy to use a company for the purchasing/developing entity. She says losses will be struck in that entity. My partners accountant says its the way it should be done and thats that. Im lost, my partner is the more senior having done 10+ developments, but i am not sure about his consultants advice. Can anyone comment on what the potential risks are when forming a partnership with someone else and purchasing and developing the site in a company structure? My partner will also have a higher shareholding then myself as he will be contributing more funds to the project, is there a way to make voting rights equal even though the shareholdings may not be equal?
It is not acceptable for a professional response to a question to be “and that’s that”. There are pro’s and cons to both structuring alternatives. You can split shares between the voting rights, dividend rights and capital rights - so yes you can.
L Losses ? That isnt a good plan. I agree with Ross thet there are + / - for each and these all most ebe considered. Even how finance approval etc is reqired affcets this. A lender may not want a Director without share interests etc. One limit to a company is the lack of a shareholder agreement is that shareholders cant demand or expect a dividend. That can be a concern. Then there can be issues if you want profits out quickly with profits being unfranked etc. Then if service fees are being paid it can affect GST funding and avoid the dividend route. There are loads of variables and thats just tax. Then there are the land tax, legal issues etc and finance. And how "profit" is calculated and determined ?
few options to discuss as well 1. partnership of discretionary trusts 2. partnership of companies 3. mix of the above 4. unit trust 5 development entity contracting to landholder. lots more to consider
Partnership of each side's entity with a company appointed as trustee. This might be better as loss could be utilised by each side separately going forward. Not all developments make a profit
agree and subject to part iva a profit trust might be able to distribute to a loss trust if that does occur.
A partnership was what my accountant was talking about. This site is likely to be a 5 year site, possibly more, and we are looking at other sites that range between 3 to 8 years, some are rezones so could even be a little longer. I think the view from my accountant was the ability to offset profits from some sites in a given year, to losses on other sites in a given year, basically looking at it as a consolidated group. Whereas, with the company structure it would be an island, with each site being on its own. Is that right? I still havent worked out what the benefit of the company structure is, is it easier for the accountant? Or more simple to prepare? Whats the benefit of it?
It could be. a company structure is simple. Have you considered the effect of the structure on the ability to get finance?
sounds like he is suggesting having a development company incur all the development and site costs and oncharging those to the landholding entities. can be a useful structure for achieving the purpose he has suggested. as long as its kept conmercial unlikely for part iva to apply. you wont get much help from forums as what you are doing has a lot of moving parts.
Going to have to agree with your accountant, at face value. In practice, I usually see this as a partnership of companies or discretionary trusts for the reason you have described. A single company would trap losses similar to a unit trust. Separate entities may also allow each partner to steam income (from other sources) into the loss making entities during the development phase.
