Small Business structure for mum & dad

devank

devank

Hello,
I’m hoping to get some answers before we jump in and setup the structure.

My wife and I have two very small week-end businesses (partnership). We started the first one (data modelling and web development) when we were at uni so that we could get contract jobs. We still keep that business as we don't want to abandon our exsisiting customers. The other one is something my wife is passionate about (dance) but not much financial benefit comes from it.

Now we want to have some level of protection for our personal assets. All our assets are 50:50.

So we are planning to create a discretionary trust (trading trust) and move both businesses under that trust. Also want a company as corporate trustee. We are planning to have both of us as appointers for the trust and one of them is going to be the director for the company. We both will be the shareholder of the company as well.

Now these are my questions.
1. What will happen to the Trust if we both die (appointers)? Is it enough to update the will with this new trust?

2. What sort of things are compromised by being appointers (both of us), director (one of us) and share holders (both of us)?

3. In a worst case scenario, are we risking everything under the company and half of our personal assets (director's portions)?

I would really appreciate your feedback and answers.

Regards,
devank
 
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With trusts you need to build into the deed the succession of appointors on death. Trust assets dont form part of the estate of an individual nor do positions such as trustee or appointor. But it may be possible to specify in the will but this may not be effective and is best done outside the will.

Dont forget to plan succession of the trustee company as someone getting control of this company can control the trust and vest all assests. I had a client whose father died and left him as appointor but he didnt know about this for about 10 years and in the meantime the accountant had control of the trust until he as appointor changed the trustee.
 
Shareholders bear no risk and neither do appointors. Being a director can be very risky especially with the need to give personal guarantees for credit and leasing premises etc.

There is also the risk that someone could argue that you and the trust are one and the same similar to the argument in richstar case. But a subsequent case in nsw sc rejected this argument. But it would still be prudent to plan your trust so that this argument is weakened such as having a third party appointor too.
 
Worst case scenario is the company is sued and loses and the director is also liable.

The creditor will then come after the directors personal assets. This would be everything in your name and also other assets possibly such as spouse assets depending on how much is at stake and how you purchased these assets. Eg if you purchased a house in your wifes name but she never worked and you paid for the deposit and all repayments then they may be able to argue that the house is in fact yours in full or in part and your wife is just a trustee for yourself.
 
If you are ever going to borrow money, doesn't matter what structure you use, you will have to give a personal guarantee as a director of the company/trust.

The easiest and simplest way is just to have all your proper assets in a family trust of which you are one of the beneficiaries, controlled by a company that you are not a director of and which you are not a shareholder of, either.
 
Aaron_C said:
If you are ever going to borrow money, doesn't matter what structure you use, you will have to give a personal guarantee as a director of the company/trust.

The easiest and simplest way is just to have all your proper assets in a family trust of which you are one of the beneficiaries, controlled by a company that you are not a director of and which you are not a shareholder of, either.
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Then who would you make the directors of the company? Someone in your family that you can trust/is in a low risk profession?
 
Aaron_C said:
Yes that's correct. Perhaps a parent / close relative / spouse etc.
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Terry_w said:
Being a director can be very risky especially with the need to give personal guarantees for credit and leasing premises etc.
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That is a problem. How can we ask anyone else to be the director and take risk?

The only reasonable solution I can think of is to make my wife as director and buy any future IPs under my name only.
 
devank said:
That is a problem. How can we ask anyone else to be the director and take risk?

The only reasonable solution I can think of is to make my wife as director and buy any future IPs under my name only.
Click to expand...

I don't accept that being a director is 'risky'. Besides, Terry's comment about risk is only in the context of borrowing money via mortgage/lease. So being a director of a family trust which owns all the property/assets isn't really risky at all if the fund has adequate net assets.
 
Terry_w said:
Worst case scenario is the company is sued and loses and the director is also liable.

The creditor will then come after the directors personal assets. This would be everything in your name and also other assets possibly such as spouse assets depending on how much is at stake and how you purchased these assets. Eg if you purchased a house in your wifes name but she never worked and you paid for the deposit and all repayments then they may be able to argue that the house is in fact yours in full or in part and your wife is just a trustee for yourself.
Click to expand...

Is the director only liable in cases of negligence? Ie the reasonable actions/reasonably foreseeable arguments?

If what you say is true Terry then companies designed to limit liability dont, and trusts dont either, and having the family home in partner's name is useless too and we are potentially all vulnerable regardless of structure. Is that your view or do you think these things are still useful and protection 99.something of the time and you are just raising the slim possibility of something really bad happening (resulting in a lawsuit) followed by a really bad judgement in a court? ie highly UNlikely but theoretically possible?
 
knightm said:
Is the director only liable in cases of negligence? Ie the reasonable actions/reasonably foreseeable arguments?

If what you say is true Terry then companies designed to limit liability dont, and trusts dont either, and having the family home in partner's name is useless too and we are potentially all vulnerable regardless of structure. Is that your view or do you think these things are still useful and protection 99.something of the time and you are just raising the slim possibility of something really bad happening (resulting in a lawsuit) followed by a really bad judgement in a court? ie highly UNlikely but theoretically possible?
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Hi Knightm,

There are several ways a director can be liable:
1. Personal guarantees. usually required for any credit given to the company
2. OHS breaches, illegal acts, non remittance of super and PAYE tax, insolvent trading (not keeping records = insolvent trading) etc
3. Blurring the loan between the company and the person.

Companies are definitely worthwhile and add lots of added asset protection by limiting liability. But the director can sometimes go down with the company.

But, the truth is anyone can sue anyone. I have some clients now who were setting up a 'joint venture' with another family and were using a company. The other family pulled out and now they are suing my clients, husband and wife, as individuals and not the company. They have to go to the expense of defending themselves and there is a chance they could lose.
 
Terry_w said:
Hi Knightm,

There are several ways a director can be liable:
1. Personal guarantees. usually required for any credit given to the company
2. OHS breaches, illegal acts, non remittance of super and PAYE tax, insolvent trading (not keeping records = insolvent trading) etc
3. Blurring the loan between the company and the person.

Companies are definitely worthwhile and add lots of added asset protection by limiting liability. But the director can sometimes go down with the company.

But, the truth is anyone can sue anyone. I have some clients now who were setting up a 'joint venture' with another family and were using a company. The other family pulled out and now they are suing my clients, husband and wife, as individuals and not the company. They have to go to the expense of defending themselves and there is a chance they could lose.
Click to expand...

Thanks Terry - this is interesting because i might set up a company and/or trust one day.

1 - I wont be able to limit liability re debt as I fully plan on borrowing for real estate. I can accept this and I know if I manage my cash flow it shouldnt be cause for concern

2- If (in the first few yrs at least) I have no employees and dont commit crimes or fraud and keep good records with my accountant etc then I can live with this too and dont see it as a reason to lose sleep

3 - this is the bit i dont understand. I thought the whole point of a company was to be a "person" ie legal entity and separate the company and the person. Can you describe this "blurry line"?

Re your clients that sounds awful and expensive. I wont bother asking for details about why they are being sued if its still on foot.
 
knightm said:
3 - this is the bit i dont understand. I thought the whole point of a company was to be a "person" ie legal entity and separate the company and the person. Can you describe this "blurry line"?
.
Click to expand...

Contracts can be either oral or written (except for land which need to be written to be enforceable).

So say 'you' are installing toilets. You meet a man at a BBQ and say "I install toilets", he says great "I need a new toilet can you come around tomorrow and install one in my shop".

Is the contract between you or your company Toilets R Us Pty Ltd And him or his company owned shop, Toiletless Shop Pty Ltd?
 
Terry_w said:
So say 'you' are installing toilets. You meet a man at a BBQ and say "I install toilets", he says great "I need a new toilet can you come around tomorrow and install one in my shop".

Is the contract between you or your company Toilets R Us Pty Ltd And him or his company owned shop, Toiletless Shop Pty Ltd?
Click to expand...

I hate lawyers :p
 
ok, so bear with me ...

with the toilet thing it sounds like the language used that has caused the confusion and possible blurring between the company and the person who attends weekend bbq's on their own time.

if he had said "I own a company that does toilet installation" this may have been clearer?

given your original mention of a jv gone wrong and family groups if I ever was involved in anything like that then need to be VERY careful to use language (verbal and written for ALL communication) that clearly reflects the contracts, the agreements, the structures in use. if I was ever in business I need to use language that describes the business for what it is. Don't get so into sales mode at the front end that I say things like "shell be right mate I'll make sure you are ok, Im gonna look after you and we are gonna make millions..."

is that the gist?
 
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