We are frequently asked about family and small business structures, particularly in agriculture and family business.
Partnerships generally consist of two or more individuals, however there can be other structures. From an asset protection perspective, partners are jointly and severally liable, which means if you are in a business partnership (parents and children for example) and that business has a successful claim brought against it, each partner’s personal assets are exposed. For example, if you hold agricultural land in your name, and are also in a business partnership, there’s no asset protection for your land if the business is exposed to risk. Also, if you don’t have a partnership agreement and one of the partners passes away, under current legislation the partnership will have to be dissolved, unless there’s an agreement to the contrary. A simple check to undertake is:
- do I have a partnership agreement?
- do I have personal assets exposed to the business being conducted by the partnership?
Companies are becoming increasingly popular in family business and small to medium enterprises. They are recognised world-wide as a business structure and in Australia have advantageous tax rates. In addition, personal assets, subject to some director liability and insolvency issues, are generally not exposed if a company has a claim filed against it.
However, care needs to be taken when considering how the shareholding is structured, for example if the shares are originally issued for $1.00 in personal names, but you later want to restructure to provide some asset protection, there can be significant taxation issues if the company shares have increased in value – even if no money changed hands. Therefore long term planning when a company is first established can save considerable pain and expense later.
Furthermore, as with partnerships, a company should have a shareholders agreement to minimise the risk of dispute, and to deal with any issues should a shareholder pass away and those shares are held individually, or if control of the share changes if held in a trust structure. An appropriate succession provision is also important in a shareholders’ agreement to protect the remaining business owner against claims from their former business partner’s spouse.
Typically business structures include discretionary or unit trusts. Similar to companies, it’s important to check ownership of units in a unit trust and whether a unit holders’ agreement is in place.
In 2022, both the courts and the Australian Taxation Office undertook a “correction” of discretionary (or family) trusts. So it’s crucial to understand the current landscape with trusts both from an asset protection and taxation perspective.
Discretionary (or family trusts) usually have a broad class of discretionary beneficiaries. Essentially a trustee holds assets for the beneficiaries named in the trust deed and the trustee has significant duties in acting as trustee. The trustee is the legal entity that makes the day-to-day decisions in respect of trust assets, however fundamental control is generally with the person (or entity) named as appointor/principal or guardian – as they will usually have the power to change the trustee under the deed terms.
There can also be some long term issues depending on who the beneficiaries are and what the balance sheet shows in respect of assets and liabilities. Important health checks for discretionary trusts include:
- can I find the original trust deed and all subsequent amending documents?
- do I have any beneficiaries in the deed that might be problematic?
- is the trustee considering all beneficiaries when making resolutions in respect of trust assets and income?
- is there anything problematic in the balance sheet as far as who owes, or is owed, money to or by the trustee of the trust?
This article was originally published in Queensland Country Life