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Ownership Structures & Agreements

Assets, including businesses, can be owned in various structures. The structure that you choose will depend on your circumstances and the different objectives that you would like to achieve in relation to the ownership of that asset/business such as long term wealth creation, tax effectiveness, asset protection, income distribution, estate planning, etc.

The highly skilled team at Ferguson Cannon Lawyers will work with you to ensure the structure you choose is the right one for you. Call our office today on 1800 640 509 and speak to Byron Cannon for comprehensive and accurate advice regarding your situation.

Sole Traders

This is an ownership structure where a natural person owns the asset in his/her own name. It is often used by small single operator businesses.

Advantages:

• easy to establish
• less expensive
• the owner has complete control.

Disadvantages:

• The owner has unlimited risk and any debt incurred by the business will be recoverable directly from the owner's personal assets without limit of liability.
• It is more difficult for a sole trader to raise capital to purchase or start a business.
• The owner is personally liable for tax on all earnings of the business, and cannot distribute any earnings to minimise tax.

Partnerships

A Partnership can be carried on by between 2 and 20 people. A Partnership is governed by the Partnership Act and also can be governed by a Partnership Agreement.

Advantages:

• it is easy to establish
• partners may carry on business under a business name
• it combines the resources of a number of people to make financing easier
• it is simple to administer as the profits and losses are shared between the partners in accordance with their share.

Disadvantages:

• All partners together are personally responsible for the debts of the partnership and each partner is individually liable for debts incurred by the other partners. They have an unlimited risk. This is known as being 'jointly and severally' liable.
• All partners have a right to participate in the management of the partnership unless otherwise agreed.

Limited Partnership

A limited Partnership involves people contributing funds to an asset or business and receiving the proportion of the profits. In a Limited Partnership however these people cannot be involved in the management. A Specialist Manager is usually hired to conduct the business.

Advantages:

• limited partnerships allow funds to be raised without management rights being relinquished

Disadvantages:

• as with a normal partnership, partners are responsible for the debts of the partnership, even those incurred by other partners

Trusts

In its simplest description, a trust is an arrangement for the holding and management of property by one party (the trustee) for the benefit of another, (the beneficiary) or for another specified purpose. There are many different types of trusts including Discretionary Trusts, Unit Trusts and Hybrid Trusts.

Advantages:

• trusts can be a useful mechanism for the distribution of income and assets
• trusts separate the control of an asset from the owner of the asset and may therefore be of use in protecting the income or assets of a young person or a family unit.

Disadvantages:

• the laws regarding the duties of trustees and the administration of a trust are complex and onerous
• the trustee has a strict obligation to hold and manage the property for the exclusive benefit of the beneficiary or beneficiaries of the trust.

Company

If a Company owns an asset, the owners or controllers (shareholders and directors) of the Company are treated as separate legal entities from the Company itself.

Advantages:

• generally shareholders can only lose the value of their shares and are not liable for the debts of the company
• the company enters into legal arrangements in its own name, not in the name of its directors and managers
• the company tax rate for companies is less than the highest rate for individuals.

Disadvantages:

• the rules relating to establishing and running a company are more complex and costly than other business structures
• lessors, suppliers and lenders are reluctant to lend money or enter into contracts or leases with proprietary limited companies, unless personal guarantees are provided by the directors or shareholders
• profits distributed by companies to shareholders are also taxable.
• directors may still be personally responsible if a company trades whilst insolvent.

Personal Guarantees

If personal guarantees are provided as a director of a company, or trustee of a trust, it is very important to consider the risk that this places on the individual’s assets.  Careful consideration must be given to your asset protection goals, before a personal guarantee is signed.

Agreements

In any form of ownership structure, except for sole traders, an agreement should be entered into between the parties who own the ultimate asset. For example in a Partnership a Partnership Agreement will be entered into; in a Unit Trust situation, a Unitholders Agreement will be entered into between all of the Unit Holders in that Trust; in a Company a Shareholders Agreement will be entered into between the Shareholders who own the shares in the Company.

An Ownership Agreement will outline many different administrative and strategic functions of the entity that it relates to. It is a very effective tool to reduce the risk of any disagreement between parties into the future. An experienced solicitor will prepare this Agreement between the parties. The Agreement should include provisions relating at least to the following:

a)       the obligations of the principles such as capital contributions, roles, ongoing time commitments, restraints and other business and professional qualifications;

b)       leave entitlements;

c)       remuneration and profits. A detailed remuneration and profit distribution policy is important as is illness entitlements;

d)       management structure including delegation of responsibilities, appointment of CEO, meetings, voting;

e)       admission of new parties including whether or not unanimous consent is required for new owners, and valuation principles to be adopted if new owners are admitted;

f)        a detailed dispute resolution process;

g)       detailed provisions relating to the exit of principles through death, disability or retirement including valuation policies, options for existing and continuing principles, restrictive covenants, ownership of key assets such as intellectual property pre and post exit, whether exit is to be funded by insurance etc.

 

We can take the stress out of preparing these very important agreements.

Ferguson Cannon Lawyers have an experienced team of Lawyers and Paralegals in our Asset Protection Division that will be able to assist you with all of your requirements for ownership structures and agreements. For any further queries please do not hesitate to contact Byron Cannon, Director, on 1800 640 509, or email byron@fclawyers.com.au.