Home – New Forums Starting your journey Family Trust for startup selling product, seeking investment etc.

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  • #990776
    VicNick
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    • Total posts: 4
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    Hi guys,

    I have an Internet-based startup (product-centred) that I’ve been running as a Sole Trader. I’m looking to change the structure for a couple of reasons:

    * limiting liability,
    * employing people as part of a more professional-looking structure,
    * seeking investment/Venture Capital (in return for equity or convertible note) at some future time,
    * having an appropriate structure in-place in case we get acquired/bought (if at all it happens few years down the line),

    So I met with 2-3 local accountants and advisers, and they all recommended me to go for a ‘non-trading ABC Pty Ltd (with ACN but no ABN/TFN/GST) a trustee for XYZ Family Trust (no ACN but with ABN/TFN/GST) trading as MNO Business Name’, where the business name will be the name of the primary product. I couldn’t ask them a few general questions due to the time constraint, so I’ll appreciate if some of you can shed some light on them:

    1. Is a trading family trust (and the recommended structure above) suitable for seeking investment or sale of business? Are potential investors and buyers generally open to this kind of a structure? Will they be investing in or purchasing the company, the trust, the business name or all of them? In an event of acquisition, what will be the tax implications for the trust beneficiaries (CGT?)?

    2. Some of the customers of my Web-based product are not located in Australia and are not Australian residents. I assume I still have to register for GST if the total turnover is close to $75,000, but the 10% GST will not apply for such customers. Is that correct?

    3. I read somewhere about another structure: having a family trust (with an individual trustee) become a majority shareholder in a trading company, instead of a non-trading company become a trustee in a trading trust. Which is better/recommended?

    4. Is there any online service that can let me do all of it in one go: register company, customize trust deed and register trust, register for ABN/TFN/GST/PAYG and register a business name?

    Looking forward to hear your thoughts and advice.

    Thanks in advance!

    #1178552
    NickKaro
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    • Total posts: 226
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    Hi VicNick

    Whilst your questions are a little too specific to provide advice on this forum, I am happy to assist with some guidance.

    My contact details are on my website (link below) and my 1st meeting/call is free.

    Regards
    Nick

    #1178553
    Dave Gillen – Former FS Concierge
    Keymaster
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    Hi VicNick,

    Welcome aboard the forums and best of luck with the startup!

    Dave

    #1178554
    Caticlan
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    • Total posts: 9
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    VicNick,

    Sounds exciting if you are looking to take your business to the next level.
    Generally in response to your queries my initial thoughts are:

    1. If your first priority is to target investors in your business then operating your business under a trading company would be a more suitable structure to allow for future investors/shareholders. However, there maybe other facts, not listed, that have directed the advice towards the family trust structure.

    2. Yes you would need to register for GST once sales exceed $75k/year and you would generally not charge GST to overseas based customers.

    3. The structure of the trading company with the shares owned by a family trust is becoming more popular due to tightened laws against using bucket company’s and lower corporate tax rate. Again it should be assessed against your overall circumstances.

    4. You should be able to arrange everything to be handled by your accountant otherwise you could do everything yourself online if you prefer. Although it would require you to visit a few websites such as ASIC, ATO etc.

    Good luck with the push forward.

    #1178555
    VicNick
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    Thanks for your replies Nick and Wayne, and thank you Dave for the welcome message.

    Is my understanding correct that with a trading Discretionary Trust (having a non-trading company trustee) the trustee has to distribute ALL profits to the beneficiaries, so basically the business cannot save part of the profits to reinvest in the business or use those funds at a later stage for growth/expansion? If that’s the case, then how do such structures even grow/reinvest in their business, or do they just pay for necessary business expenses & salaries during the year and pass along all remaining profits to the beneficiaries at the end of the year, without saving any profits to build capital for the business itself (because any unpaid profit will otherwise be taxed at the highest tax rate)? Restarting with a zero balance each financial year seems daunting as/for a business.

    I’m starting to feel that having a company with a trust as a majority or minority shareholder is a better option if one want’s to preserve some of the profits to gradually grow the business and also seek investment down the line.

    #1178556
    James Millar
    Participant
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    Given your emphasis on potential investment (either capital raising, part or full sale) I am amazed your accountants are recommending the use of a trust for the operating entity. Trusts are great tax vehicles but are not well suited to ventures that have unrelated stakeholders. The other thing to keep in mind is that there is a substantial body of law that governs the operation of companies in Australia and this provides a much higher degree of comfort to anyone dealing with your business (investors, creditors, employees, customers etc).

    Export sales will not be included in the GST turnover test. In any event export sales are not subject to GST for entities that are registered.

    Your final point is an important one if your business has a growth model that requires self funding via retained profits. Trusts don’t generally retain profits so everything has to be reinvested – unfortunately after leaking unnecessary tax to the ATO.

    One other item to consider is that trusts are not eligible for R&D tax concessions. Often important in the tech space.

    As for taking the DIY route. You’ll need to visit a few different services and spend quite a bit of time with the risk of missing something. Depends on how much you value your own time and what it could otherwise generate by focusing on the business. DIY can be a false economy.

    Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900
    #1178557
    Caticlan
    Member
    • Total posts: 9
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    VicNick,

    For tax reasons a discretionary trust will distribute all its profits every year. However, the beneficiaries do not have to take the physical cash out of the trust. Therefore they create a loan with the trust which can be repaid when there maybe excess cash reserves. This is why the trusts are popular with family groups.

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