When was the last time you reviewed the structure of your mining and resources business?
The type of entity in which your business operates will impact upon many issues: tax effectiveness, asset protection, business succession, flexibility, simplicity/complexity and administrative cost. Also, the types of risks your business faces will influence the structure.
These are potentially complex and interrelated matters, and you will require assistance from your financial, legal and accounting advisors to implement a coordinated solution that suits your stage of life and stage of business. The most important outcome for you will be peace of mind from knowing you are making the most of your opportunities as a business owner, and in a manner that also considers your personal goals.
My summary of the most commonly used business structures, along with some key advantages and disadvantages of each, will assist your review.
Your business may have been set up in the entity that was the most convenient at that time, but circumstances change. While the option to start up without incurring costs and extra administrative work is obviously appealing, it can often end up costing a lot more in the long run. This is why a periodic review of your business structure is so important…
Common Business Entities
This is the most basic structure and simply entails a person trading in their own right. In this structure you can still register a business name but you will not have any asset protection advantages which come along with an interposed entity. You also do not obtain any income splitting opportunities so it is also an undesirable structure from a tax planning perspective.
The key advantage with a sole trader is that it is the most simple structure with very little administrative or accounting costs. This structure would be most suited to a sole person consultancy operation where you do not envisage hiring any employees or taking on any partners, you do not expect to incur a lot of debt or obligations and where your risk of being sued is relatively low and where your income expectation is also relatively low (similar to a wage that you would get working as an employee).
A partnership is a relatively common structure for professional practices and consultancy businesses with one or more principals. The key advantages of a partnership are that each party can enter into the partnership in their preferred entity so it can be relatively tax effective and the structure is quite simple administratively.
The traditional partnership is a partnership of individuals. For many professions, such as lawyers, this was required by the rules. It is now quite common for partnerships to be partnerships of family trusts or companies as this allows the asset protection and tax advantages outlined under the headings of Family Trust and Company.
A company is a good structure for a business with multiple principals. It is similar to a partnership in that each principal can own their share of the Company in their preferred entity (as a shareholder) but it provides asset protection advantages in the form of limited liability for shareholders.
The main disadvantage with a company structure is that there is an extra level of expense in setting up and operating. There will be additional ongoing compliance and tax issues. People can be hesitant to deal solely with newly formed companies and if suppliers and landlords seek personal guarantees from shareholders or directors, some of the asset protection advantages will be lost. A company can also act as a corporate trustee for a trust for an extra layer of asset protection and to provide succession flexibility.
A family trust (or discretionary trust) is primarily used as a tax and estate planning and asset protection vehicle. It is generally inappropriate as a stand-alone structure operating a business with multiple principals (as the interest of each beneficiary is not defined) but it is a commonly used vehicle for each principal to own their share of a business in a family trust. For instance, it is common for each shareholder in a company to be the family trusts of the separate owners.
The major disadvantage to a family trust is the extra expense incurred in establishing and operating the trust, however quite often this is offset by tax savings achieved.
A unit trust is generally used for businesses with larger numbers of owners where each owner may not own an equal interest. it is also a very commonly used structure where the trust will also own one or more pieces of real property (land). Some of the advantages of a unit trust are that it is very simple to introduce new equity partners, they are generally less regulated than a company, the interests of owners are well defined, and they are a good vehicle for asset protection and provide some tax benefits.
Some of the disadvantages of a unit trust are that they are generally not as flexible a tax planning vehicle as a family trust, and there is an added layer of expense occurred in establishment and operation. if any losses are made, they are trapped in the unit trust structure. There can also be difficulties incurred when it comes time to transfer the business as funding and disposal must be dealt with very carefully to minimise CGT. Buyers of units in a unit trust which owns a business will also incur transfer duty in some circumstances where a transfer of shares in a company would have been free of transfer duty.
A joint venture is usually entered into where two separate entities come together for a particular project often where those parties have particular assets or skills to bring into the joint venture arrangement. It generally does not lend itself to ongoing operation of a business as a going concern by principals who are just putting in cash as capital and generally adding similar skills. The structure is often used in mining projects but rarely for consulting businesses.
There are a lot of variables to consider when reviewing business structure so it is important that you take adequate financial planning, accounting and legal advice. This will ensure that you are using an appropriate structure for your business; that tax planning and wealth and succession goals are considered fully; and that appropriate documentation is prepared to ensure that your chosen vehicle operates properly.
If you would like to discuss the structure of your mining and resources business, please contact me, Ian Hillhouse, on 61 (0)7 3007 2007 or email email@example.com
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No responsibility will be taken by Hillhouse Legal Partners for loss occasioned directly or indirectly to any person acting or refraining from acting wholly or partially upon or as a result of the material in this publication.