In Australia, there are many different ways you may structure your business ownership. We discuss below some of the considerations when structuring your business ownership for asset protection.
Common Structures in Australia
Common structures for business ownership in Australia include:
- Sole Trader
- Partnership of Individuals
- Company
- Discretionary Trust
- Unit Trust
- Superannuation Fund
Some of the common structures may be used together to create a stronger ownership structure. For example, a company may be incorporated to act as the trustee of a trust, or a discretionary trust may hold shares in a company. Any of these structures may participate in a joint venture.
It may also be desirable to use more than one of these structures to separate trading risks from the business assets. For example, incorporating one company to hold the trading risk and another to hold assets, such as the intellectual property. Provided that suitable documentation is put in place, this can protect business assets from trading risk, should the trading company become exposed to a claim.
Generally speaking, where there is a corporate trustee (i.e. the trustee is a company, not an individual), a discretionary trust or a superannuation fund provides the greatest level of asset protection out of the above common structures.
Discretionary Trust
Beneficiaries of a discretionary trust usually have no fixed entitlement to the value of the trust fund until such time as the trustee attributes value to them. Where the trust deed is appropriately worded, beneficiaries are often protected from business debts. It’s important to note that the trustee is personally liable for business debts, but will be indemnified out of available trust assets.
Superannuation Fund
In the context of a superannuation fund, the beneficiaries’ accounts are usually protected from the creditors of the beneficiary. Lenders of a superannuation fund have no recourse against the fund, only against a particular asset.
Unit Trust
Again with a unit trust, where the trust deed is appropriately worded, unit holders are often protected from business debts, however the value of their units in the unit trust will be available to their creditors on bankruptcy. Again the trustee is personally liable for business debts, but will be indemnified out of available trust assets.
Company
With a company, similar to a unit trust, the shareholders are protected from the company debts, but the value of their shares will be available to their creditors on bankruptcy. Directors can also be personally liable if they are trading while the company is insolvent. For this reason, careful consideration should be given to who should be appointed as the company directors.
Partnership of Individuals & Sole Trader
The partnership of individuals and sole trader structures offer no asset protection and are not separate legal entities to the individuals. Due to their joint and several liability, individuals operating under the partnership structure may also be exposed to their other partners’ debts. In both of these structures, non-business assets may also be exposed. Insurance can be used to provide some protection to the individuals.
A partnership of discretionary trusts is also an option to provide a greater level of asset protection than a partnership of individuals, however this is a less common structure.
Note on personal guarantees
It’s important to note that personal guarantees signed by the individuals behind business structures will expose those individuals to personal liability for those debts.
Legal documentation
When setting up your business structure, it’s important to ensure that you also put in place suitable legal documentation to tie the structure together. For example, where you have set up a separate legal entity to own assets like intellectual property, it’s important to then document a licence between the trading entity and the asset holding entity to enable the trading entity to use the intellectual property.
Where there are multiple founders, you should also consider putting in place agreements between yourselves (or your nominees if applicable). Depending on the structure you decide on, this might be for example a partnership agreement, a shareholders agreement, a unit holders agreement or a shareholders and unit holders agreement. These agreements should include appropriate succession provisions or a separate buy / sell agreement should also be entered into.
Other considerations when structuring your business ownership
Each of the structures should be considered not only in the context of asset protection, but also in the context of their tax advantages and disadvantages, their set up and running costs, their flexibility, control, growth and succession plans, and the suitability for the business of which it will own and operate. Your business structure should be decided on after consultation with both your Accountant and your Lawyer.
We can advise you on which structure might be suitable for you, as well as assist you in establishing the structure and drafting any supporting legal documentation required. Contact us on 1300 941 900 to speak to our team.