Legal Structures

I get asked all the time:

"What is the best legal structure to operate my business in/buy my investments in/ own my home in?"

The reality is that there is no "best". Each has their own pros and cons and you need to sit down with someone who knows your affairs properly and decide on the best structure with them.

As a guide here is a brief rundown on the structures that are available:

  1. Sole Trader - you personally own the business and operate as an individual. This is the easiest structure to operate as it is imply an extension of yourself. You run your business or own investments in your own name and wear the profits, losses and tax liabilities all on your lonesome.
  2. Partnerships - Each partner owns a share, based on whatever calculation, and operate as a single entity, however in unison. This is s very risky structure and offers no real benefits - in my experience. You need to prepare joint and individual tax returns so I would always advise my clients to look at other options.
  3. Companies - a separate legal entity is created and the shareholders own the company via the shares that they purchase. Directors are appointed and operate the business on behalf of the shareholders. Liability for loss is limited to the value of the shares paid for unless you area Director whereby you have substantially more responsibility to ensure that the company's affairs are operated properly.
  4. Trusts - This is a structure enacted by legislation that allows assets to be held for the benefit of others. The operations are overseen by the trustee of the trust, which can be a person, persons or company. This structure probably offers the greatest flexibility and allows income to be split legally amongst beneficiaries to allow lower levels of overall tax to be paid. There is a slightly higher cost of administration and this structure requires good advice to ensure that the full set of potential benefits are being achieved.

From a practical point of view I use trusts extensively with my clients. They provide great flexibility and are very cheap to set up and run. Assets are protected well and they suit a great deal of operations and investments to provide the greatest security and the minimum level of tax payable.

As mentioned the "best" structure will depend on your needs and goals. Your advisor is best placed to determine the right structure to employ and I encourage you to have a discussion.

Finally, no structure will work well if you are not making money. Be sure to get the right advice before starting whatever your venture is, as any structure can be costly to unwind if you make a mistake.

Published on March 3-st, 2008 in Financial Planning
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.