In order to best protect assets and have flexibility with cash flow and paying the right amount.
- Minimise exposure to risk:- (eg don’t try to take out risky behaviours in business or personal life)
- Insure against risk (take out the right insurances)
- Avoid owning assets in entities where risk is attached.
Asset protection of common structures
- Sole Trader – No asset protection
- Partnership – If individuals – no asset protection
- Company – High level asset protection – risk quarantined to company. Shareholders other assets protected. But be mindful of insolvent trading – director’s may be at risk.
- Discretionary Trust – In business use corporate trustee for asset protection. High level asset protection.
- Unit Trust – High level same as above.
- SMSF – Very well protected.
Typical Mum & Dad situation – where business succession isn’t likelihood
Type of structure:
Discretionary trust (Corporate trustee). ‘High risk’ spouse is director of corporate trustee. ‘low risk; spouse is the shareholder. ‘high risk’ spouse owns no assets. Assets & house in the name of ‘low risk’ spouse or a trust or SMSF if investment.
Company structure for the trading entity recommended in the following situations (discretionary trust hold the shares):
- Arm’s length parties going into business together for a medium to long term growth goal. Eg not a short term joint venture.
- Income and profit is projected to be above $180,000 per family group from day 1.
- In Queensland you need a QBCC license. I find QBCC work easier direct with company structures than trusts (less of a need for a deed of covenant)
- Succession planning where parties can easily enter & exit the business at will and not have to pay stamp duty for the goodwill the company has generated. (If just buying, selling & transferring shares)
- 5% tax rate now applicable which is great for the working capital of the company.