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Let's run through a few scenarios and work out which structure is the best for them.
Tax Snap available from Resources tab.
Date published: 1 September 2021
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TRANSCRIPT
You should have a good idea already based on the four criteria that we gave you, tax planning, asset protection ability to sell your business and complexity and cost to maintain. At what point you really thinking you need each entities.
So let's just give some quick scenarios.
Microbusiness 00:15
So very simply, if you were a someone who's just started a small little business you're not going to be earning much. You might just be doing some things on the weekend. You know, it's not very risky, there's not much happening in that business. It's just a few little bits and pieces. You're more likely just to want to set up a sole trader. Yep. That's the easiest one to maintain. You're not going to have any tax disadvantages from doing that. You don't need asset protection. So it's simple. Just do that. Perfect.
Power couple 00:42
Let's say you and your spouse are doing the same thing, but it earns a little bit more income. Partnership. You're both going to be working in the business. But you still know what I mean, only that much you don't need the asset protection. And the tax planning isn't really something you needed to consider. You might sell it one day, but that's still good to get the concessions. Yeah. And that's a really good one too if your spouse say it a low-income. So one of the partners has a low income. Then at least maybe 50% of the partnership income could go into their name, legally. Exactly. That that's cost effective tax planning. Correct. Brilliant.
Growing robust business 1:14
Company. You are a larger business. You want that asset protection. You are thinking about the future plans. You might want to sell half your business to someone to join you later. That's right. Succession planning. Yeah. There might be more than one of you going into business together who are unrelated. It's not you and your spouse. It's you and Tim. Yeah. You know, you don't want to, yeah. You don't want to be a partnership.
You might not want to be a discretionary trust either. So a company is the best. robust entity for that situation. Yeah. It, it provides you, you know, it's a little bit complicated, but it's not the most complicated. You can sell your business. You can sell your shares. There's asset protection and you have tax planning opportunities.
I reckon company is probably easy to get finance to Dan. Yeah. From the bank. I actually think for any business bigger than give very micro business level. A company most of the time will be your option. Oh, he's come out and said it. Dan thinks the company is the best. Not the best because every scenario has a different, different needs.
Family business 2:15
So the next one along might be you you've set up a business. You've got a family it's you and your spouse, your spouse might not work or they might earn less than you. You want that asset protection or maybe your spouse is about to go have kids. Have time off. Well, even more, Dan. If you've got kids approaching 18. Kids approaching 18. You might be studying and you've got to support them for several years, with their study. They might not have income. Well, guess what? You can legally distribute income to them. So a discretionary trust is the best option there. And that's going to outweigh any of the cons that a trust is going to have over a company. I say, if you're choosing between those two, because that could be several thousand dollars per child per year, that you use that.
Yep. So while those rules that are in place, a lot of people are still going to go down that path. And to me, that's why the trust could be the best. If you were in that scenario. It's a very specific scenario. And this is why it depends. Yeah. So let's say, let's just say the trust is the Rolls Royce, if your scenario fits, correct? Absolutely. But then the company could also be the Rolls Royce of entities. Yeah. If your scenario fits. It's just not as, quite as exciting as the trust.
Combining structures 3:27
And so there is also other options here that we haven't explored. And so we won't go into them. We might do a more complicated entity structure, but just as an example. Let's just give one. Food for thought.
You have a company that runs a business, several shareholders. Yep. But the shareholders, aren't an individual. They 're a trust. They are trust. Wow. That's a, that's an interesting way to do it Dan. Why would you do that? Well, because then the profit distributions, your dividends can then be legally split between you and your partners in the same fashion that we just spoke about.
So let's say you have, this family, the spouse doesn't know that much income, but you do. So if you get dividends from that company that you own, it now can be legally streamed to your spouse. That's pretty powerful. And save you a lot of tax. Yeah. I really liked that one. I liked that one a lot and there's, there's there's others like that. So it depends how complex and what your scenario is. That really works because you've got, like you said, different shareholders and they may have partners and may have no income. Yep. That's a big one. That's right.
No one best structure but there is a best for you 4:31
So that power of knowing the entities, knowing how they can combine, knowing your, your personal circumstance. And then what's going to work best for you.
So there is no best entity structure, is the answer. That is the answer. But for you, there is. There is a best, that's a good one. Tim. There is a best for you. There is the best for you. There's no one best. Yeah. Yeah. There is a best for you. Great. All right. Well, I think that's the end of that main topic.