A family business often starts out small – being your own boss is appealing and you take your passions from being a hobby to a vocation for the future.
Adopt
When you start out your accountant may suggest an ideal family business structure for your immediate circumstances. As your business grows beyond everyone’s expectations and evolves into an intergenerational business, the structure that was suitable at the outset may no longer be efficient to achieve your wealth creation goals or your family’s goals.
Adapt
It’s therefore important not to set and forget. Your original structure may need to be adapted to accommodate growth and future succession. Family circumstances can also change as you may see in the following scenario, where we have a family/discretionary trust with a corporate trustee.
Mum Hope and Dad Hope have two children, Paige and Peter. Paige decides she wants her own career and is never involved in her parents’ business, whereas Peter has worked in the family business from the time he left school. Peter is paid a wage from the business. In the past, the trustees have decided to distribute the remaining profits to Mum and Dad Hope then evenly to both children.
Scenario 1. Mum and Dad decide to retire. Can they access cash?
Mum and Dad decide they will just sell an asset in the trust. But do they own the assets in the trust? No they don’t. Fortunately, there are ways to get funds out of the trust for retirement and capital gains tax (CGT) rollover relief may be available to restructure.
Scenario 2. Peter wants equity in the business. Can the trust structure adapt?
Unfortunately, Peter’s wish is not going to come true. The business is structured as a family business discretionary trust with the assets managed by the trustee. In this case, it is a corporate trustee and Mum and Dad are the directors. The trustee can distribute the profits at their discretion. They could distribute 100% of the profits to Paige, and ignore Peter.
Scenario 3. Paige is getting divorced. Are the trustís assets safe?
This will depend on whether or not Paige has been paid her trust distributions each year. If she has an unpaid present entitlement, those funds will become part of the divorce settlement. This could mean the business is forced to sell assets to pay the entitlement.
Scenario 4. Mum and Dad pass away. Who is in control?
What happens when Mum and Dad pass away depends on whether they mention in their Will who is to take over their shares in the trustee, enabling that person to appoint new directors of the trustee company. Additionally, if there is an appointor for the trust, the appointor may have the right to remove the trustee and appoint another company as trustee. Often a trust is set up quickly with little thought as to who will be appointor (if the deed requires one to be nominated). The appointor may be a previous accountant, solicitor or someone else you no longer have regular contact with.
Improve
It’s always important to speak to your advisor when your business is taking a new direction as family matters could impact the business or put working capital at risk. Always fully inform your accountant or advisor of the individual circumstances impacting you, your business and your family. This will help your advisor determine the best structure for your business to adopt so you can always adapt and continue to improve.
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