How to structure a family owned business
Many businesses in New Zealand are family owned and managed. Some are large
and financially very stable but the majority are mom and dad owned
businesses. The dynamics and stresses involved in the ownership of a family
business are unique. Therefore the structure needs to be very carefully
planned and customised for each individual family circumstance. What should
the ideal family business structure achieve?
* First and foremost the family must feel as safe and secure as possible.
* Secondly the structure must, as much as possible, remove the exposure of
non-business assets (primarily the family home) from something going wrong
in the business or a marriage or relationship breakdown.
* Thirdly, the structure must be such that income can be split to take
advantage of differential tax rates between personal rates, company rates
and family trust rates. In other words, legal tax minimisation working hard
for you.
* Fourthly, the structure must be flexible to allow for a partial or full
change of ownership. This change may be forced by a marriage or relationship
breakdown or by a family member wanting either to be bought out or to buy
in.
* Fifth, the structure must allow for succession planning for the next
generation or total retirement and sale of the business.
* And last, the structure should protect the productive or income producing
side of the business from business risk - essentially uninsurable risk.
That's a long list of outcomes to expect to achieve from the ideal family
business structure. Well, take it from me, that's what the modern business
environment forces upon any family owned and managed business.
If you take a close look at the ideal outcomes, you will find that being in
business without a well considered structure is risking far too much.
Business is about taking risk - but why risk more than you have to?
The typical ideal structure should incorporate at least one company and at
least one family trust. Here are the basics to consider:
1. It is desirable to separate business assets from non-business (passive)
assets. As an example a family trust owning the family home that also owns
the building that is leased to the business is not ideal. If the tenant of
the building (i.e. your business) fails, then what protection does the trust
give to the family home if the rent stops coming in? None, yet this is a
common scenario.
2. Two trusts are most desirable where there are a mixture of both business
and family assets. The need to separate productive assets from passive
assets is important. Essentially a productive asset is more risk prone than
a passive asset so do not put it in the same basket.
3. A trust is an ideal entity to take ownership of a company's shares -
especially if the company is new and hasn't traded - because there is no
value and no gifting involved. As the company increases in value, so do the
value of the shares and hence the value of the trust. Dividends can also be
directed to the trust at the tax rate of 33% which will be less than the
personal tax rate of 39%. Potentially a significant tax benefit.
The flexible nature of companies combined with family trusts as shareholders
offer family owned businesses asset protection, relative accounting and
operational simplicity and various tax options. For instance, a company may
have a trust as owner of, say, 98% of shares and two family members owning
1% each. If the two family members work for the company and the company
generates more than $120,000 profit, then the two family members could take
$60,000 each as salary and additional profits can be paid as dividends to
the trust. This keeps the family members out of the 39% tax regime.
Please note that this information covers only the basic concepts. There are
many variations and every family business should have a tailor made
structure to match their family circumstances, the nature of the business,
the assets at stake, family and business debt, taxable income and most
important of all, a five or ten year plan to guide the structure objectives.
This article has been supplied by Jamie Tulloch from Wood Rivers Hawes,
Accountants and Business Advisors
(www.woodrivers.co.nz)
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