Business Structure Chart

BUSINESS STRUCTURE CHART

This chart is intended to provide a quick guide to factors bearing on the selection and trading and investment structures. Each structure is evaluated by reference to the same criteria, in order to allow for a ready comparison.

	Sole trader	Partnership	Discretionary trust	Unit trust	Private company
Exposure to liability	Unlimited	Unlimited, as well as joint and several	Limited – subject to trust deed	Limited – subject to trust deed	Limited
Control over assets	Absolute	Joint	Uncertain	Collective	Separated
Accommodation of general wealth creation	Wealth at risk	Wealth at risk	High level of asset protection	Wealth at risk	Company wealth at risk
Ability to obtain finance	Good	Good	Reasonable	Good	Good
Disclosure of results	None	None – other than between partners	None	None – other than between unit holders	Disclosure requirements of the Corporations Act
Compliance costs	Low	Low	Medium	Medium	Medium – High
Exposure to family disharmony	Moderate to high	Moderate to high	Moderate	Moderate – Low	Low
Employee v proprietor	Proprietor	Proprietor	Employee	Employee	Employee – Director
Accommodation to succession planning	Low	Low	High	Moderate	Moderate
Accommodation to estate planning	High	Moderate – Low	High	Moderate	Moderate – High
Ability to restructure	Low	Low	High	Moderate	Moderate
Immediate and ultimate rates of tax	Personal marginal rates	Personal marginal rates	Beneficiary rates – marginal or corporate	Beneficiary rates – marginal or corporate	Initial company rate – top up or refund to personal rates
The tax base	Business expenses limited	Business expenses limited – some further financing expenses	Normal – ability to provide benefits to associates without FBT or Div 7A	Normal ability to provide benefits to associates without FBT or Div 7A	Normal – benefits to employees and shareholders subject to FBT or Div 7A
Access to concessions generally	Good	Good	Moderate	Initially good – but subject to claw-back	Initially good – but subject to claw-back
Access to 50% CGT discount	Yes	Yes	Yes	Yes (post 1 July 2001)	No
Access to small business concessions	Yes	Yes	Yes – subject to “controlling individual” test	Yes – subject to “controlling individual” test and claw-back	Yes – subject to “controlling individual” test and claw-back
Income diversion and accumulation	Little opportunity	Moderate opportunity	High opportunity	Moderate opportunity	Low to moderate opportunity
Incidence of tax losses	Personal	Partner level	Quarantined in trust	Quarantined in trust	Quarantined in company
Ability to carry forward tax losses	Unlimited	Unlimited	Subject to complex carry forward rules	Subject to complex carry forward rules	Subject to complex carry forward rules
Incidence of financing costs	Personal	Partner level	Trust	Trust or Unit-holder	Company or Shareholder
Cash Flow Considerations	Good	Good – subject to agreement	Good – subject to distribution or loan	Good – subject to distribution or loan	Poor – subject to distribution or Div 7A commercial loan
Private and business expenses	Mixed	Mixed	All business	All business	All business
Effect on social security entitlements	Direct	Direct	Possible	Direct	Direct
Personal exertion rules	Do not apply	Do not apply	Potentially apply	Potentially apply	Potentially apply
Super contributions	Partially deductible – subject to limits	Partially deductible – subject to limits	Deductible – subject to limits	Deductible – subject to limits	Deductible – subject to limits
Possible application of anti-avoidance	Low	Low – medium	Medium – high	Medium	Low

As a general rule, choosing an appropriate investment or business structure involves the following steps;

Starting with clearly defined commercial objectives;
Discerning the boundaries of the applicable law; and then
Seeing how best to fit the commercial objective within these legal constraints.

There is no point in designing an investment or business structure around taxation considerations alone, as either the business will fail or the business structure itself will be subject to attack by anti avoidance provisions.

An investment or business structure must also;

Be understood by those who ultimately own the assets or run the business; and
Be flexible and accommodate change.