Business Structuring & Asset Protection

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1 Business Structuring & Asset Protection

2 Business Structuring & Asset Protection Are you starting a new business? Is your existing business costing you a fortune in tax? It is crucial that all business owners seek expert legal and accounting advice concerning business structuring and asset protection. New Businesses Ideally, expert legal and accounting advice as to business structure and asset protection should be obtained before a business is established. The costs of setting up a corporate structure are relatively nominal in the scheme of your business. Consideration should also be given to appropriate Partnership and Shareholders Agreements at this time. If the wrong business structure is chosen, the problems outlined below under the heading Existing Businesses are you at risk? may occur. Existing Businesses are you at risk? Many business owners start their business off as a sole trader or husband and wife partnership. Although either of these options may be suitable when the business is relatively small and not earning much income, this will change if the business is successful and more flexibility (and tax effectiveness) is required in relation to the distribution of the income. The other disadvantage of a sole trader or husband and wife partnership is that the business proprietors have direct personal liability for all creditors and clients/customers. This means that if the business is sued or becomes insolvent, the business proprietor will be personally liable for these debts or any damages that are awarded against them in court actions. This has the effect of putting the business proprietor s personal assets, such as their home and car, at risk. The role of a Company in Asset Protection Using a corporate structure (that is, a company as a trading entity or a discretionary or unit trust with a corporate trustee) for a business can offer business owners the following advantages:- Limited liability of a company Providing a company does not trade whilst it is insolvent, the company is only liable to its trading partners and creditors for the 2

3 value of its assets or shares. If the assets of the company are only two shares of $1.00 each, the total amount that any creditor could obtain from the company is $2.00. The director of the company is not personally liable for any debts or actions unless the company trades whilst it is insolvent or the director has given a personal guarantee on behalf of the company. Recent amendments to the legislation have increased the Personal Liability of Directors to the extent that they will be personally liable for all outstanding superannuation contributions and PAYG tax relating to employers of the company. Reduction in Tax A corporate structure also has flexibility in relation to the distribution of the income generated by the business. For example, in a family business the husband, wife and other family members can be used to distribute income. There is also the ability to pay franked dividends through the company and limit the tax payable to the corporate tax rate (currently 30%). All contracts are with the company limiting exposure to litigation Providing no personal guarantees have been given by the director/s, in any contractual dealings with trading parties, all contracts entered into by a company will be in the name of the company. Therefore in any contractual disputes, the right of action is against the company and not against the director/s or the business proprietors personally. This means that if the company is sued and a large judgment is obtained against it for damages, the successful party can only extract the value of the shares from the company (i.e. $2.00). There is no action against the director/s personally, unless personal guarantees have been given. Please note that sole traders or husband and wife partnerships have a direct personal liability in all contracts they enter into. This means that you can be sued personally and all assets in your name are potentially at risk. Most couples own their family home in joint names, as well as investment properties. Imagine if these were put at risk! Companies and trusts don t die A corporate structure is crucial for ensuring business succession a company cannot die. If the director of the company dies, the company continues operating as it did before the death of the deceased director. The only requirement is that a new director must be appointed to take the place of the deceased director. The same logic applies to a trust. A trust will not cease to operate 3

4 because the director of the trustee company, or the Appointor of the trust, has passed away. However, it is important to ensure that appropriate measures have been taken in the Will of the deceased business proprietor to ensure a smooth transition for the business. Those issues are examined below under the heading Modern Estate Planning for Business Owners. KEEP YOUR BUSINESS ASSETS IN A SEPARATE ENTITY It is important that valuable assets are not held by your trading entity. For example, you should hold any plant and equipment in a separate entity and lease or hire these to the trading entity. This ensures that if the trading entity fails, you still have the business equipment and tools of trade to continue operating as a business. Likewise, any factory, office or property should be owned by an alternate entity to safeguard these important assets. Business Succession Planning What about a dispute between co-owners? While many business proprietors choose to use a corporate structure to reduce the risk of being personally sued, they neglect to look inside their business and the effect that a dispute between co-owners or the death of a co-owner could have on their business. Such disputes can be managed, or even avoided, by the implementation of agreements such as Buy/Sell Agreements and Shareholders Agreements. In planning for the sale or purchase of a co-owners interest in the business in the event of retirement, death, permanent disablement or serious injury/trauma to one of the business owners, the parties should enter into a Buy/Sell Agreement. A Buy/Sell agreement sets out the process of such events and often involves an obligation to fund any purchase price by way of an insurance policy, either owned by the Company or the proprietors. A Shareholders Agreement (which is essentially a form of partnership agreement when operating a corporate structure) should also be entered to by co-owners to set out the agreement with respect to the management and control of the business and the responsibilities of each co-owner. Importantly, a Shareholder s Agreement will also set out the rights and obligations of co-owners in the event of a dispute or a proposed sale of part or all of the business. 4

5 Modern Estate Planning for Business Owners The personal affairs of a business proprietor should also be compatible with the structuring of their business affairs. Spending the time and money on business structuring should be carried on over into the personal estate of the business proprietor, otherwise all that time and money spent on a tax effective business structure could all be for nothing. Modern Estate Planning, or succession planning, is the process of looking at the business proprietor s entire asset pool both personal and business assets and liabilities and devising the best way in which to give assets to beneficiaries, provide for surviving family members, keep corporate entities running whilst providing for asset protection, tax minimisation and the effective distribution of superannuation death benefits. This is often achieved through a Modern Will incorporating a Testamentary Trust. When incorporated in a Will, a Testamentary Trust can provide savings on income and capital gains tax and shield inheritances from occurrences such as divorce, bankruptcy and being sued if the beneficiary is in a high risk occupation. A Modern Estate Planning Will can also assist in equalising or adjusting an estate between beneficiaries by balancing non-estate assets such as life insurance and superannuation proceeds with other estate assets. Equalisation of an estate is often crucial in a blended family situation or where there is a business to fund. Consideration should also be given to other non-estate assets, such as protecting a home owned as joint tenants from the risk of litigation and the establishment, or management, of a Self- Managed Superannuation Fund to maximise retirement savings. As we have set out above, companies and trusts continue on even when people die. To this end, all business proprietors should have a Will which includes provisions to ensure the succession of these entities after the death of one of the business proprietor. Additionally, if a director of a company or the person who controls a trust has an accident or becomes incapacitated, it is essential that appropriate personal and company Powers of Attorney provisions are prepared in the course of the estate planning process to ensure that the partner or spouse of the deceased can operate the business entities without interruption. 5

6 Risk Management Assessment Your business is one of your most valuable assets and it s worth spending time and money on putting the right structures in place. Prevention is certainly better than cure. We offer a risk management assessment to review your current structures, or assist you in setting up new structures and provide you with practical legal advice. For all enquiries regarding business structuring and asset protection see one of our experienced estate planning and business structuring lawyers. Contact Donna Tolley on etc (07) or dtolley@attwoodmarshall.com.au to make your appointment today. 6

7 Attwood Marshall Lawyers Pty Ltd ACN Family Law Elder Law Retirement Estate Planning Estate Litigation & Contesting Wills Deceased Estate Administration Business & Commercial Transactions Dispute Resolution & Commercial Litigation Conveyancing Compensation Law Thoroughbred Breeding & Racing Locations Coolangatta Office (Head Office) Suite 1, Level 2, The Strand Marine Parade Coolangatta QLD 4225 PO Box 334 Coolangatta QLD 4225 DX Coolangatta Kingscliff Office 1b Pearl Street Kingscliff NSW 2487 PO Box 1413 Kingscliff NSW 2487 Freecall