Family businesses make up around 70% of all businesses in Australia. Most family businesses start off organically. Someone has an idea for a new enterprise and starts a side project that takes off. Or perhaps a member of the family buys a store or food outlet, and the rest of the family pitches in.
While this casual arrangement can be working just fine for now, it’s important to think about the future, and to plan for the growth and challenges that any business – including yours – will face.
Issues that you may not see coming can cause enormous conflict in the future, such as communication difficulties between family members, changes in leadership, family member compensation disagreements and more.
Part of that due diligence is making sure your family’s small business is structured in a way that protects its longevity. Looking to help structure this? Hire a small business accountant!
Choosing the right business structure
As with everything in life that’s built to last, your family business must stand on strong foundations. But what suits one type of business won’t necessarily work for another.
Tax rates, liabilities, operating expenses, control of the entity, access to capital, succession planning, distribution of profits and tax planning are just a handful of the machinations available under each distinct business structure.
Let’s take a quick overview of the main types of structures for small businesses in Australia.
Company
A company is a separate legal entity. It has the same rights as a person. It can incur debt, sue and be sued. The company’s owners can limit their personal liability unless they give personal guarantees.
A company has –
- A set tax rate.
- Limited personal liability for members.
- Separate assets.
- Its own bank account and money.
- Wider access to capital.
- Multiple annual reporting requirements.
- Higher setup and ongoing administrative costs.
Company directors must also follow requirements involved in ASIC registration and must comply with legal obligations under the Corporations Act.
Partnership
A partnership is a structure involving 2 or more people who distribute income or losses amongst themselves. There are three main types of partnerships: general, limited, and incorporated. The main difference between them is that each has different levels of liability exposure in certain scenarios.
Partnerships have –
- Less setup costs than companies.
- Minimal reporting requirements.
- Shared control and management.
- Unlimited liability for all partners.
- No superannuation obligations (partners are responsible for their own arrangements).
- No income tax on its income (partners pay tax on their share of the net income they receive.
Trust
A trust is a legal structure with the purpose of holding assets for the benefit of others (beneficiaries). Trustees can be either a person or a company.
Trusts have –
- A Trustee responsible for everything in the trust.
- Stronger asset protection benefits than partnerships.
- A formal trust deed that outlines how it operates.
- Yearly required administrative tasks.
- Flexibility for tax purposes.
- More complicated setup requirements.
Criteria to consider
As you can see from the above, there are different pros and cons to each structure. Finding out which suits your business best requires some serious consideration, and it’s best to get expert advice to help assist your decision.
Because with less than 10% of family businesses making it to the 3rd generation, it’s clear that the assumption that the family can work things out as they go along is fatally flawed.
The most important criteria to consider when choosing the right legal structure for your family business fall around asset protection, the number of family members involved (and at what level of control), and tax planning.
Where to get further advice
At National Accounts, we understand that every family is different. We provide tailored advice to establish and operate your family business’ structure to grow and preserve your wealth.
To discuss your family office needs, call us on 07 8166 6705 or email info@nationalaccounts.com.au and set up an appointment with one of our family office specialists.
