BUSINESS STRUCTURES & RISK MANAGEMENT 6/7/20162

When your clients own and operate a business, whether buying an existing business or starting up a new business, you should be aware of the different business structures that are available to the client. CHOICE OF BUSINESS STRUCTURE There are several forms of business structures available such as: Sole trader Partnership Joint Venture Trust Company Or a combination of the above. The hardest thing about deciding on what type of business structure to adopt is not only trying to understand the different structures available, but also understanding what type of structure is most suitable for the customer. Three factors that are commonly thought about when deciding what type of structure is better are: 1.Limiting liability 2.Maintaining control; and 3.Minimising tax. Three factors that are commonly thought about when deciding what type of structure is better are: 1.Limiting liability 2.Maintaining control; and 3.Minimising tax. Other factors can also be important, such as: 1.Succession planning; 2.Borrowing requirements; 3.Ability to maintain the structure; and 4.Admission of other people into structure. Other factors can also be important, such as: 1.Succession planning; 2.Borrowing requirements; 3.Ability to maintain the structure; and 4.Admission of other people into structure. 6/7/20163

SOLE TRADER Contracts with third parties Liabilities Business Name Income Tax As a sole trader, you are trading as an individual. Some Advantages ● Simple and easy to understand. ● Complete control. ● Low administrative and running costs. ● Usually only simple accounting techniques are required. Some Advantages ● Simple and easy to understand. ● Complete control. ● Low administrative and running costs. ● Usually only simple accounting techniques are required. Some Disadvantages ● Difficult to split income with another party for taxation purposes. ● Liability is not limited so there is a risk having all assets available to third parties. ● The structure cannot survive the death of the trader. Some Disadvantages ● Difficult to split income with another party for taxation purposes. ● Liability is not limited so there is a risk having all assets available to third parties. ● The structure cannot survive the death of the trader. 6/7/20164

Generally, a partnership is defined as a relationship which exists between persons carrying on a business in common with a view to profit. Some Disadvantages Customer only has control over the business proportionate to customer’s interest in the partnership assets. The interest in the partnership is not easily transferable to another. Customer may be bound to use the same tax elections as the other partner. Liability is not limited and you expose yourself to being held liable for the actions of your partner Some Disadvantages Customer only has control over the business proportionate to customer’s interest in the partnership assets. The interest in the partnership is not easily transferable to another. Customer may be bound to use the same tax elections as the other partner. Liability is not limited and you expose yourself to being held liable for the actions of your partner Some Advantages Partnership itself does not pay tax. Relatively inexpensive to establish (although a Partnership Agreement is strongly recommended). Possible to split income. Some Advantages Partnership itself does not pay tax. Relatively inexpensive to establish (although a Partnership Agreement is strongly recommended). Possible to split income. PARTNERSHIP Partnership agreement 6/7/20165

Settlor Trustee (Usually a company) Trustee (Usually a company) Discretionary Trust Beneficiary 1 Beneficiary 3 Beneficiary 2 Beneficiary 4 The person who settles the trust, usually for a nominal sum The trustee has legal ownership of trust assets for the beneficiaries As Trustee of Beneficiaries have an “expectant interest” only in the income and assets of the trust. 6/7/20166 DISCRETIONARY TRUST Appointor The person who controls the appointment & removal of the trustee, and thereby indirectly controls decisions concerning the trust Appointor The person who controls the appointment & removal of the trustee, and thereby indirectly controls decisions concerning the trust Appointor

Conceptually, a Trust is an obligation on one person to hold property for the benefit of another. The property is dually owned. The trustee has legal ownership and the beneficiary has equitable ownership. Predominant types of trusts used in business structures are: The Discretionary Trust Deed A discretionary trust deed creates the trust and it should set out the rights and obligations of the trustee, the appointer and the beneficiaries. Please note that not every trust deed is standard and it is recommended that you seek legal advice before signing a trust instrument. 6/7/20167 TRUSTS Discretionary Trusts The entitlement of beneficiaries to both income and capital is generally at the discretion of the trustee. Unit trusts In a unit trust, each unit holder has a fixed entitlement in the trust estate and any income flowing through the trust is distributed to each unit holder in proportion to their entitlement.

Main Features of a Discretionary Trust are:  Contributes a nominal sum to establish the trust;  Usually a friend or an employee of customer’s law firm; and  Cannot be a person who is or will be a beneficiary of the trust.  Contributes a nominal sum to establish the trust;  Usually a friend or an employee of customer’s law firm; and  Cannot be a person who is or will be a beneficiary of the trust. The Settlor  Powers and responsibilities of the Trustee are extensive and should be detailed in the trust deed;  The trustee may be an individual, but more commonly is a company; and  The trustee has legal ownership of the trust income.  Powers and responsibilities of the Trustee are extensive and should be detailed in the trust deed;  The trustee may be an individual, but more commonly is a company; and  The trustee has legal ownership of the trust income. The Trustee  These are the individuals that have a beneficial interest in the trust income. The Interest is not fixed and it is up to the discretion of the trustee how much of the trust income is distributed to each beneficiary;  Generally, beneficiaries will include the members of the customer’s family.  These are the individuals that have a beneficial interest in the trust income. The Interest is not fixed and it is up to the discretion of the trustee how much of the trust income is distributed to each beneficiary;  Generally, beneficiaries will include the members of the customer’s family. The Beneficiaries  The Appointor has the power to appoint and remove the trustee and, therefore, indirectly controls who makes decisions concerning the trust; and  The Appointor can be an individual or a company  The Appointor has the power to appoint and remove the trustee and, therefore, indirectly controls who makes decisions concerning the trust; and  The Appointor can be an individual or a company The Appointor (or The Principal)

ADVANTAGES & DISADVANTAGES OF DISCRETIONARY TRUSTS ADVANTAGES  Income sharing within the family;  Can employ individuals and provide salary packaging;  Ability to refinance working capital;  Limitation of liability if the trustee is a company; and  Tax advantages. ADVANTAGES  Income sharing within the family;  Can employ individuals and provide salary packaging;  Ability to refinance working capital;  Limitation of liability if the trustee is a company; and  Tax advantages. DISADVANTAGES  More expensive to set up and run than a partnership or sole trader;  Knowledge of director responsibilities are required if the trustee is a company;  Must distribute income to someone at year end; and  Losses can be trapped in the trust. DISADVANTAGES  More expensive to set up and run than a partnership or sole trader;  Knowledge of director responsibilities are required if the trustee is a company;  Must distribute income to someone at year end; and  Losses can be trapped in the trust.

UNIT TRUST as trustee for  Unit Trust Deed  Unit holders Agreement as trustee for 50 CORPORATE TRUSTEE THE BUSINESS UNIT TRUST Corporate Trustee ARAGON FAMILY TRUST Trading Company Director – Aragon Director – Legolas Director – Aragon Director – Legolas Corporate Trustee LEGOLAS FAMILY TRUST

The main features of a company are:  it is a separate legal entity incorporated under the Corporations Act 2001 (Cth);  companies are regulated by this Act and their constitution;  it can sue and be sued in its own name;  it can own property and incur debts in its own name;  it has perpetual succession – unaffected by death or the bankruptcy of members;  it can contract with shareholders;  it basically enjoys the same rights/incurs same obligations as natural persons; and  when a company cannot pay its own debts, instead of the company becoming bankrupt, the company becomes “insolvent”. Some Advantages:  Limited liability (subject to some conditions).  Relatively easy to introduce participants.  Can employ individuals and provide salary packaging.  Company tax rate is a flat 30%.  Low stamp duty rates on share transfers and no stamp duty on issuing new shares. Some Advantages:  Limited liability (subject to some conditions).  Relatively easy to introduce participants.  Can employ individuals and provide salary packaging.  Company tax rate is a flat 30%.  Low stamp duty rates on share transfers and no stamp duty on issuing new shares. COMPANY Shareholders  own the company and have limited liability as to the extent of their paid up share capital Shareholders  own the company and have limited liability as to the extent of their paid up share capital Directors  control the management, directions and day to day activities of the company  have many powers and responsibilities in relation to the company Directors  control the management, directions and day to day activities of the company  have many powers and responsibilities in relation to the company Some Disadvantages:  More expensive to set up and run than a partnership or sole trader.  Separate tax return and company accounts required.  Knowledge of director’s responsibilities required.  Can be less effective in limiting liability if you undertake to become guarantors for the company. Some Disadvantages:  More expensive to set up and run than a partnership or sole trader.  Separate tax return and company accounts required.  Knowledge of director’s responsibilities required.  Can be less effective in limiting liability if you undertake to become guarantors for the company. COMPANY

The process of managing exposure to risks that could harm your customer’s business or the individual associated with the business.  Identify the risks;  Put in place procedures to prevent and/or control risks, or reduce the likelihood of occurrence  Some ways to reduce/ minimise exposure to legal risks include: - Business Structure; - Operating terms, including: * trade terms; * supply chain strategies; * written contracts with warranties & indemnities; * seeking guarantees when contracting with certain legal entities. - Insurances; - Buy Sell Deeds; - Succession Planning. RISK MANAGEMENT

INSURANCES BUSINESS RISK / PERSONAL  Assets  Public liability  Business interruption / loss of profits  Business expenses  Income protection  Life insurance  Health  Total and Permanent Disability  Directors and Officers Liability  Workplace Insurance (if employing) BUSINESS RISK / PERSONAL  Assets  Public liability  Business interruption / loss of profits  Business expenses  Income protection  Life insurance  Health  Total and Permanent Disability  Directors and Officers Liability  Workplace Insurance (if employing) BUY SELL DEED  Business Associates  Call option / Put option  Triggering events  Death  Total and Permanent Disablement  Insurance proceeds  Timing of claim  Repayment Options  Premium Payments BUY SELL DEED  Business Associates  Call option / Put option  Triggering events  Death  Total and Permanent Disablement  Insurance proceeds  Timing of claim  Repayment Options  Premium Payments

TYPICAL STRUCTURE Asset/IP Licence Contracts with Mortgage Debenture Charge Trust Holding Company Pty Ltd as trustee for Trading Company Pty Ltd Customers OWNS  Intellectual Property  Trademarks  Business Assets  Land  Business Name OWNS  Intellectual Property  Trademarks  Business Assets  Land  Business Name OWNS  Stock  Some trading assets  Business goodwill OWNS  Stock  Some trading assets  Business goodwill Landlord Suppliers and third parties ASSET HOLDING ENTITY RISK ENTITY THIRD PARTIES

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