I have been reading through a number of threads in this forum, and there has been some excellent, user-friendly advice provided, which I'm hoping to use to my advantage!!
I am soon to start working privately with an associate. We want to do this instead of being sole traders, because we complement each other well and have worked together effectively as a team as employees. We don’t want to enter into a Partnership for taxation and liability reasons, and have met with an accountant to discuss options. This has left us both a little bamboozled, and I would appreciate getting some clarity around the situation before we head back to the accountant, so I can join the dots more effectively.
In layman’s terms, what we want to do is set up an “entity” of some sort which invoices clients and pays expenses and provides us both with the most tax effective profits and minimises liabilit of our personal assets. However, due to outside commitments there will be times when either one of us does more or less work over a given period of time, and we want to allocate profit as a proportion of work undertaken rather than have a 50/50 split.
My question is, what can this “entity” look like? Is it a company that pays each of us wages or dividends, and if so, can this be done to represent a proportion of profit for work done? Do we have a discretionary trust with a company acting as trustee? Do unit trusts play a role? Should we be looking at a combination of all the above?
Another factor to consider is changing circumstances… if one of us wants to leave the arrangement, or disputes arise down the track that we don’t forsee, how can we set up systems now to manage this?
Any advice would be greatly appreciated, and I will emphasise again we are going back to the accountant – I just want to keep working on my self-education so that our time with her is used more efficiently and I can ask better questions.
Thanks,
Steve
I would never use a partnership as it is very dangerous. Always use a company for business because of the limited liability – you could use two companies in partnership if need be or one company with half the shares owned each. Watch out for being director as this is risky and also watch out with control – who owns the majority of the shares will have legal control, but whoever controls the bank account/money will have the real control.
I would suggest using a company and paying yourselfs a small wage. Then each of you can also receive bonuses based on your own work. You could do this as employees or sub cotnractors to the company. Ideally you would want to divert as much of your income/profit into your own discretionary trust (he can do the same) to make it more tax effective.
You could have your shares of the company owned by a discretionary trust or a unit trust with units owned by a discretionary trust. Units are more easily transferred than shares and ASIC doesn't have to be notified.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Terryw,
Thanks so much for taking the time to reply. Just to clarify further, we would have a company with the shares owned by separate discretionary trusts (I assume that we should both have our own), or that the shares are owned by one unit trust, with the units split between the two of us (but both owned by our discretionary trusts rather that ourselves as individuals). Is there an advantage in using one or the other structure?
If we set up a company, who should be directors? Both of us? And also, could be both own the access to the bank accounts?
And one other quick question if you know the answer! If we subcontract ourselves to the company, rather than work for the company as employees, does that mean we avoid issues with worker's comp insurance, PAYG and superannuation?
Thanks again for such good advice! Hopefully another meeting with the acct early next week and I'm starting to get a better picture of what I need to be asking!
Cheers,
Steve
I might also mention that my business partner and I are both unmarried and with no dependents… From what I've read, the benefits of discretionary trusts are that you can distribute income within a family to avoid higher tax rates… Are there any other benefits?
Cheers
Hi Steven
Ideally he should be director – the director goes down with the ship sometimes or at least may get a bad credit rating if the company goes down. But, it is the director that runs the company so they do have some power that a non director will not have such as signing contracts etc so it could be dangerous if you are not also director.
I think you should each have your own trusts. If you have a unit trust under, then the trust will need a trustee and then you have issues with control etc. Probably best to each do your own thing.
If you are contractors rather than employees then you would be responsible for you own tax and insurance and super etc. But you would also be at risk without the protection of the company if something goes wrong. You may also find you are taxed as an employee anyway if you don't meet certain rules. Also under the corporations act and bankruptcy act if you are performing work and are under paid then the creditors may be able to sue the company/trust for your wages if you were to go bankrupt later. So it is probably best to be an employee and receive a small wage and then divert profits into your own discretionary trust which can then treat it tax effectively and give you asset protection.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
steve4750 wrote:I might also mention that my business partner and I are both unmarried and with no dependents… From what I've read, the benefits of discretionary trusts are that you can distribute income within a family to avoid higher tax rates… Are there any other benefits?Cheers
Asset protection and estate planning. tax can also be capped at 30% and later if you get a spouse/chidlren you can effectively distribute income to them without needing to change anything.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks again!
How would a discretionary trust look? From what I've read that as an individual, I can't be the trustee and the beneficiary of a discretionary trust. Is that right?
Cheers,
Steve
You couldn't have a trust with you as trustee and sole beneficiary – otherwise it wouldn't be a trust, and there would be no discretion.
But what you do is have a trust with the beneficiaries being X, children of X, step children, spouses, grand children, grand parents, cousins, and any company in which any beneficiariy is director, shareholder or office holder etc.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
I should add, that way if you marry someone in 10 days and he/she has 5 children then they will automatically become beneficiaries. If you want to add a company as beneficiary down the track then you can form a new one and become director of it and it will become a beneficiary – then you can distribute to that and cap the tax at 30%.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks for all your help Terryw, I greatly appreciate it.
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