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  • #981365
    InspiredTechs
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    Hey Guys,

    My name is Leon and i started my own business this year!
    All very exciting. I found this forum from some google searches and it looks to be a great resource!

    Just have a question to ask to get some advice/info before i get to an accountant.

    Now i was advised by another business owner to set my business up as follows.

    So i have the pty ltd company which is the trading company, and i have my family trust which owns the pty ltd company.

    Is that the right way i want to have it set up?

    And from there, i then become an employee of the family trust and the trust pays me.
    The trust will bill the company for management fees to cover this.

    Am i along the right lines there? It is all pretty confusing.

    I will be getting in to speak with an accountant in the next couple of weeks, but hopefully i can clear up some details with the knowledge available on this forum.

    Thanks,
    Leon

    #1129815
    PRO
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    Hi and welcome

    It will depend on who else is in the entity.

    One of the issues with the company being a trading company, especially when you are starting, is that it pays 30c in the dollar tax from day one.

    If you had a company as trustee of a family discretionary trust as the trading entity, it pays no tax on profit, the individual or other entity that the trust distributes the profit to pays tax at its marginal tax rate. If you distributed $80,000 profit to an individual the would pay $17,547 tax + $1200 medicare levy. A company would have paid $24,000 tax on that. The differential gets worse the higher the income and the more low income family members you can distribute income to.

    There are also other issues to consider, including asset protection. An accountant is not legally able to give you advice on those sort of topics as that constitutes legal advice. Don’t get me wrong, a great Accountant is a vital part of your professional advisory team, but the information they are allowed to provide on structuring is limited.

    I have attached an example of a trusts based business structure that we would advise on in particular circumstances. These utilise a multi-layered structure to remove the intellectual property from the trading entity, as well as keep as much equity as possible out of the trading entity.

    There are also alternative structures to this, including significantly cheaper basic ones, it just depends on what you need. Sometimes a straight Pty is more suited.

    Forum members may be able to assist if you gave more information, such as:
    -individuals who need to have control of the business
    -individuals who need to receive a financial benefit form the business
    -are all of the above related
    -do you intend bringing in non-related investors/owners into the business in the structure
    -The state you want to establish the business in
    -do you or will you at some stage lease premises
    -do you or at some stage will you have employees
    -do you or at any stage will you have creditors
    -do you or will you service a large number of customers or will it be limited to a few
    -what sort of services does the business provide and is it reliant on you (personal services income rules may apply)

    There will be other information that you may not wish to provide on a public forum regarding assets, relationships etc. But any information you can provide will help.

    Darryl

    #1129816
    InspiredTechs
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    PRO, post: 147163 wrote:
    Hi and welcome

    It will depend on who else is in the entity.

    One of the issues with the company being a trading company, especially when you are starting, is that it pays 30c in the dollar tax from day one.

    There will be other information that you may not wish to provide on a public forum regarding assets, relationships etc. But any information you can provide will help.

    Darryl

    Thanks for the detailed post Darryl
    So i possibly may have set it up in reverse to what it should be?

    Ok as for the questions

    -individuals who need to have control of the business – Just me for now
    -individuals who need to receive a financial benefit form the business – just me for now
    -are all of the above related – yes
    -do you intend bringing in non-related investors/owners into the business in the structure – Not currently but it potentially could down the track
    -The state you want to establish the business in – NSW
    -do you or will you at some stage lease premises – yes at some stage
    -do you or at some stage will you have employees – yes
    -do you or at any stage will you have creditors – unsure
    -do you or will you service a large number of customers or will it be limited to a few – it could end up being a couple hundred customers
    -what sort of services does the business provide and is it reliant on you (personal services income rules may apply) – Essentially being an IT managed service provider and IT services/support.
    For now it is reliant on me, but in the next couple of years employees will be doing most.

    Thanks for your help :)

    #1129817
    PRO
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    Now worries,
    Answers below in Blue

    InspiredTechs, post: 147164 wrote:
    Thanks for the detailed post Darryl
    So i possibly may have set it up in reverse to what it should be?

    Ok as for the questions

    -individuals who need to have control of the business – Just me for now
    -individuals who need to receive a financial benefit form the business – just me for now
    -are all of the above related – yes
    This tends to lend itself towards a discretionary trust with a corporate trustee
    -do you intend bringing in non-related investors/owners into the business in the structure – Not currently but it potentially could down the track
    You could then use the established be a partner in a restructured new one, properly structured for tax purposes, stamp duty etc. Fo example, possibly an entity that holds all the intellectual property and other valuables but that grants a license to use them for specified periods of time, thus at the expiration of one of the licence periods there can be a change without taxation implications, other options also.
    -The state you want to establish the business in – NSW
    -do you or will you at some stage lease premises – yes at some stage
    -do you or at some stage will you have employees – yes
    -do you or at any stage will you have creditors – unsure
    -do you or will you service a large number of customers or will it be limited to a few – it could end up being a couple hundred customers
    -what sort of services does the business provide and is it reliant on you (personal services income rules may apply) – Essentially being an IT managed service provider and IT services/support.
    For now it is reliant on me, but in the next couple of years employees will be doing most.

    So it looks like personal services income rules should be ok

    It depends on your risk profile from here on in, I am a huge fan of a IP/Goodwill type entity that licenses to a trading entity (must be properly structured arrangement to ensure not alter ego) But a discretionary trust and corptrustee work for many in this situation, or you could look at a unit trust with the units owned by the discretionary trust (NSW is abolishing stamp duty on transfer of units in private trusts on July 1 this year) if you think the likelihood of needing or wanting to bring in an outside investor is high

    I have attached a couple of info sheets on unit trusts and discretionary trusts

    Thanks for your help :)

    #1129818
    Divert To Mobile
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    Nice documents better than reading 540 pages of cch

    Steve

    #1129819
    akagrp
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    You also need to consider though down the track you may meet the personal service income exemption with multipal clients and employees, the issue would be on timing how long down the track before this takes place. Though the personal service legislation would be the same either you operate as a company or trust.

    Also in NSW Work Cover still requires trusts to pay workers compensation for working trustee/directors even if no wages paid it is at calculated at commercial rates

    With regards to Trusts though they are a good vehicle with regards to running Investments, they are not the ideal structure for running an operating
    entity as there are restrictions. For example cannot access many government grants, cannot offer down the track employee shares and if profits are high at the end you are likely to still require a company to transfer excess profits from the trust to minimize tax at 30%

    Trusts also have a lot more restrictions on accessing past years lossess which needs to be considered

    You also need to consider if you do form a trust, do you have beneficiaries to take advantage of the trust

    Business structures are complex and business owners should seek advice and not only go on hear say as each persons circumstances are different and what works for one may not be suitable for another

    Also if the business requires lending, accessing via a company limits the risks as banks tend to require more guarantees if lending via a trust which inturm could expose trust assets

    #1129820
    PRO
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    Anna has provided some great points there. If you sat down with Anna and sat down with me, you might get 2 different opinions as to the structure to use, or you might get the same. There is no magic formula, different structures have different pros and cons and professionals will advise on what they think is best for you in your situation and based on their professional experience.

    I like trusts for trading entities up to a certain size and for a lot of purposes. I personally use multilayered trusts in property development and professional businesses.

    I have private equity clients who buy stuff in the 100’s of millions which utilise companies and rightly so.

    I also have startups that utilise companies (although individuals may own the shares through discretionary trusts) because of the multiple different owners and the ability to allocate share capital to other parties. We do rather indepth share agreements at the startup stage to protect the shareholders. A trust would not suit these types of clients.

    We do a lot with technology clients who seek to make use of venture capital to expand their businesses (hello the Bay Area in San Francisco in February), again the business itself is a company.

    I, as a rule, do not like companies for small businesses not seeking outside funding. It looks like Anna does. We could probably have a great discussion as to why I think what I do and she thinks what she does and would both understand why the other person thinks that, but respectfully agree to disagree. That’s why it’s vital that not only do you seek professional advice, but that you don’t just blindly follow their advice but try and understand the pros and cons of their advice and see if you and they are on the same page.

    D

    #1129821
    PRO
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    I forgot to add one of my issues with a straight company setup

    Asset Protection is only one way, that is the shares in the company are an asset and if held by an individual and that individual gets into trouble, creditors and bankruptcy trustees can get to the shares.

    D

    #1129822
    InspiredTechs
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    Thank you all for the incredible amounts of detail.

    It has been helpful.
    I am about to meet with an accountant and have a talk about it and see what they say.

    I think there is still a lot i will have to look into here and make sure i change the structure around to how it will best suit me before i start getting to much business in the door!

    Cheers,
    Leon

    #1129823
    James Millar
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    There is a magic formula – tick more boxes than you cross and don’t cross any show stoppers.

    You really need to look at the small business capital gains tax concessions and income alienation issues re the the management fee to the trust (PSI is only the newer prescriptive element but the old anti avoidance requirements still apply). Fact is you can’t easily split personal exertion income and the management fee as described is problematic.

    Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900
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