Rural Business Structure
When considering the correct business structure for your farm or rural business, consider the four most common business entities, which are Sole Trader, Company, Partnership and Trust.
Sole Trader – The simplest form of business entity often utilised by small owner operators. A single person operates the business, takes all the profits and is exposed to all the risk. The stability of the business is anchored to the stability of the Sole Trader. A Sole Trader will be taxed at their usual adult marginal rate and may be required to register for GST.
Company – The commonest form of business entity that has its own “legal identity”. It enables a separation between business owners and business operations in both profits and risk and is currently taxed at 30%. Companies can be both simple and complex depending on the business operations, number of shareholders (business owners) and number of directors (business operators) and may require a number of additional documents governing the various relationships. A company is federally governed and regulated and an annual registration fee is payable.
General Partnership – Historically a common form of business entity but losing regard to more asset protective and tax effective structures. A partnership is essentially two or more persons who operate a business in common with a view to making a profit. The nature of the partnership may be governed by an agreement but the partners are jointly and severally liable for the debts of the partnership. The partnership will lodge its own tax return but the partners will declare their interest in the income of the partnership in their individual tax returns and thus be taxed at their individual adult marginal rates.
Trust – Historically a common mechanism to pass assets inter-generationally. A trust essentially draws a line between the business operator and the persons entitled to the benefits of the business. It offers significant asset protection and flexible solutions to minimise tax.
Finding the best rural business structure for your farm will predominantly contemplate control, tax and exposure to risk.
While undoubtedly companies and trusts have become the more preferred entities for businesses today, your farm business may require a combination of entities.
Farming operations have always been multifaceted but the mechanisms to address control, tax and exposure to risk are becoming more sophisticated as accountants and lawyers collaborate on more practical solutions.
Companies and trusts offer smoother intergenerational transitions because you can introduce the next generation to the operations of the farm business and eventually transition the operations of the farm business to them without changing the actual legal owner of the underlying assets.
Trusts can also offer flexible tax effective solutions to minimise tax, particularly where the Trust Deed provides broad income streaming opportunities.
Companies and trusts also provide a significant degree of asset protection as opposed to Sole Trading and Partnerships. You can “ring fence” the risk of different facets of your farm business by using separate entities. For example, you could employ personnel through one company and hold the assets of the farm business in a Trust. Therefore, the assets may be protected from employee related claims. To determine the right Rural Business Structure for you call the Rural Law team on 02 8987 0000.