Partnership or discretionary trust?

Hi,

I am trying to formalise a business structure with a colleuge for a small consultancy. We already have various entities created and are trying to figure out the most efficient way to get going with what we have. I understand the "typical" structure for what we are doing would be:

* a trust through which we contract to our clients, receive a wage and employ other employees or contractors,

* Our respective companies would be the trustees of this entity

* Our respective family trusts as the beneficiaries.

As we already have a partnership dormant we created in the past, could we use this in lieu of the discretionary trust above? Do we still get the limited liability if the companies are the partners? Can it still distribute to the family trusts, potentially unevenly? Do we introduce other complications if we do it this way?

 

Hi DWS

You can have a partnership where each of your companies is one of the partners. You will typically need to distribute 50/50 unless you have a partnership agreement that states otherwise.

You can also have a standalone company where each of your respective family trusts are the shareholders - which enables you to have the legal protection of the company as the trading entity but the tax distribution flexibility options that the discretionary / family trusts offer.

There was a good post a while ago on InvestEd here about choosing an appropriate structure: http://www.invested.com.au/65/what-structure-should-i-use-operate-37263/

At the end of the day you want to find something that works of you - and hopefully gives you a balance of asset protection and tax effectiveness at a reasonable cost.

Good luck with everything!
SM

 

Thanks Superman,

So I think you are saying we could use the existing partnership we created dormant some time ago rather than a new discretionary trust.

Either could be owned/directed by companies rather than us individually (which would limit the liability in a parnership) - can we change partnership ownership of an existing parnership and how is this done?

Either option would need a partnership agreement (Partnership) or head agreement (discretionary trust).

Given that we need to cover off on a range of issues in the agreement, including rules for salaries or ourselves and employees / contractors, rules for unevenly distributing income to the trusts, insurance, expense allocations (joint/individual), is there any difference in the documentation or are they basically the same with a different name?

 

OK - so to confirm, are you looking to each have your own consultancy clients but just share the overheads?

This would probably work a little differently - so let me know if this is indeed your scenario.


In regards to your other questions - to be honest I am not sure whether your would include all those things in the formal legal agreement. I would say not.


Sorry if I am not my normal useful self!

SM

 

I don't think you can have a "dormant partnership" given that the Partnership Act describes it as a relationship that subsists between persons conducting a business jointly with a view to profit.

It is not a separate entity, but a relationship.

Difficulties exist with entry and exit or changing interests of partners that require advice to avoid dissolution and reconstitution each time (a CGT event).

Joint and several liability is a significant issue.

Traditional alternatives like partnership of discretionary trusts might be more easily implemented using a hybrid discretionary trust.

Above all, get legal advice before embarking on a business.

Cheers,

Rob

 

As per RobG, I think a Hybrid Trust would be a good alternative. Not a Hybrid in the sense of the ATO's target (e.g. property trusts and interest issues), but a real business hybrid.

Good luck. Like to know how you get on.

 

+1! this seems a good option

 

Thanks all,

sorry for the delay in replying

Yep, i think we have sorted through the options and we are largely back to plan a as per the start of the post, with the exception that we will form a hybrid trust rather than a discretionary trust.

Some clarifications to questions and commengts on what I discovered for others benefit.

a. Re "Dormant Partnership" means purely that we created this entity but never traded under it, we continued to trade independently under our own structures, hence we never used it. This was a partnership of our existing discretionary trusts, but as pointed out, potentially an issue in the future if these end up with assets in them.

b. In terms of 50/50 split, we want the flexibility to allocate shares of margin initially dependent on who get the additional work, the level of margin for each piece, the level of support agreed with the client, etc.

Ultimately we are not really Starting a new business, just merging our currently independent streams.

Have done a diagram since I am a visual person of how I now understand it works.