Determining the most appropriate business or investment structure requires significant consideration prior to making the decision to proceed.
The entity structure usually adopted includes one or more of the following vehicles:
Individual or sole proprietor
Fixed Trust and
Each structure has advantages and disadvantages which need to be assessed when determining the intention of the business or investment.
What Issues Are Relevant When Determining The Right Structure?
Liability & Asset Protection
A sole trader will generally be subject to unlimited liability whereas a company is provided significant protection with liabilities being limited to the unpaid amount on any shares issued.
Management & Control
Whilst the sole trader is essentially their own manager, a partnership needs to function within the relevant partnership act of each State and any partnership agreement that is made between the Partners. The Board of Directors (or sole Director where applicable) manage a company, however control rests with the shareholders. Trusts are managed by the trustee who in most cases is a company.
There exist a number of legal documents that are prepared, some at the time of incorporation and formation and others to document the specific relationships between the parties. In respect of trusts these include the Trust Deed and Unit Holders Agreements. Company documentation includes the Constitution (previously referred to as the Memorandum and Articles) and Share Holder Agreements.
A company or unit trust structure has a significant advantage in raising equity. They may issue various forms of capital and attach varying rights and restrictions. Ultimately they may convert to a public company and may choose to be listed on the stock exchange.
Income Tax & Capital Gains Tax (CGT)
Each structure has varying rates of tax that are applicable. An individual is assessed at normal marginal tax rates which range from 0% to 46.5%, whilst a company is taxed at a flat rate of 30%. In respect of capital gains, individual and trusts are generally able to access the 50% discount which is not available to companies.
Current taxation legislation also provides a number of concessions for taxpayers, including small business CGT concessions and research and development allowances that may only be applicable to certain entities in certain circumstances.
The cost to establish an appropriate structure can vary significantly. Whilst the costs for an individual are minimal, costs for a more complex structure involving companies and trusts in varying relationships may be significant. The greater flexibility required will generally lead to a more complex and costly structure.
In addition, the involvement of solicitors to prepare specific agreements including shareholder agreements, unit holder agreements and management agreements will contribute to further costs however the benefit of formal agreements should never be overlooked.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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The income tax treatment of any property lease incentive will vary, depending on the nature of the inducement provided.
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