Partnership/Company/Trust???

[SEM]

Hi guys

Looking at developing some property with a friend and we're trying to work out how to structure the business side of things. We both have secure jobs with above average incomes and have been best friends for about 20 years.
A quick summary of what we intend to do: buy an empty block of land and build some units on it.

We intend to build the units and sell them off once finished. They will not be rented out. If we are successfull, we will look at repeating the process over. My friend works in the building industry, and we are very confident that we can successfully make something of this (we've done the basic sums).

Contribution will be 50/50 split down the middle, as will the profits.

Now, for the questions, which is the best way to set this up:

Partnership?
Company?
Trust?
Maybe a combination....??
And what are the associated costs of each?

We will be speaking to my accountant soon; however, I would like to understand the basics before visiting the big guns.

Thanks for reading.

Sem

[whateverbusinesssolution]

Hi Sem,
Some absolute basics to get you started...
Partnership generates less admin than a corporate structure however puts your personal assets on the line. Cautionary issues on the partnership structure to be considered include that each partner represents and can bind the partnership individually. Benefits include splitting profit to the individual partners to reduce the tax onus. Typically, your personal assets are available to creditors if the project fails. Would strongly suggest a Partnership Agreement if you were contemplating this structure.

Company structures generate additional admin and costs however give your personal assets some level of protection in the event that the project fails. Companies are taxed a flat rate and so you will need to do your sums to determine the taxable income level at which the amount of tax that you pay under the company rate is less than the progressive tax that would be imposed under a partneship structure. Note that there are exceptiions underwhich the directors can be made liable for the debts of a company (S221 ITAA & S560? of the Corps Law from memory)

A trust structure (depending on the type of trust) acts in a similar way as a partnership to distribute profits to the beneficiaries. There would need to be a trustee appointed to administer the trust and there is some admin associated with this structure as well. The trustee can be a corporate trustee...

Hope this helps a little... your accountant should be able to advise you on the best type of structure depending on your particular circumstances.
Regards,

[SEM]

Thanks for the response whateverbusinesssolution.
Does anybody have any recommendations on which structure would suit this business?

[Julia Nitschke]

Hi Sem

I think why that question (what structure will suit) is not answered is beacuse it really is not something anyone can answer for you.

The explanation of structures by whicheverbusinesssolution was brillant and he explained the differences of using partnership/company/trust.

The issue about what suits will come down to what your priorities are, what do you want to achieve, because this will influence your structure choice.

For example, is asset protection your highest priority? If so you need to select the appropriate structure to achieve this. Is tax minimisation your highest priority? If this is most important, you will need to look at the structures with this in mind.

Each type of struture will have advantages and disadvantages, but once you think about what you are hoping to achieve by this venture, or what is import for you, you will be in a better position to asess which structure to use, in conjunction with advice from your accountant.

Goodluck and enjoy getting started.

[Army of One]

Yes - always difficult to provide advice without all the necessary information from all parties involved.

Because you have two separate parties working together it adds another challenge also.

If you do one thing - ensure you keep track of all the little ins and outs of money across the life of the project. You need to keep on top of your record keeping!

My generic 'advice' would be to have a discretionary trust with a company acting as trustee. This will give a solid combination of asset protection (via the company) and an ability to distribute profits in a tax effective manner (via the trust).

I would have yourself and your friend as the primary beneficiaries, with your respective families as the tertiary / secondary beneficiaries.

Associated costs can vary, your account may have set prices for setting up the structures - $1500 to $2000 would be a good price if you are getting good advice and the company constitution and trust deed are drafted by lawyers who actually know what they are doing (quality is important in this regard).

Ongoing the accounting will be about the same whichever structure you use - a lot will depend on the complexity, number of transactions - ask your accountant how you should manage it from your end to make it easy for everyone come BAS time and the end of the year.

You will have an annual $212 ASIC fee to keep the company registered - but this is no big deal considering the asset protection provided.

Your accountant may also charge a small registered office fee for acting as the registered office of the company.

Does this answer your questions?