Legal structures
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Business structures impact on who can make important decisions, tax advantages and disadvantages, how profits and losses are shared, legal obligations and costs.
Businesses need to be structured appropriately to protect your personal assets from business claims and liabilities.
Valuable assets in your business may need to be quarantined in a separate business entity to protect them against the debts of the trading entity.
You owe it to your family and their financial security to structure your business, legal and financial affairs in the most efficient ways possible.
1. We understand the advantages and disadvantages of our type of business structure.
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2. We have a business structure which appropriately deals with tax minimisation, i.e. the best use of available tax benefits.
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3. We have a business structure which protects personal assets of the proprietors from claims against our business.
Why is this item important?
Running a business is a financial risk, so personal assets of the proprietors need to be quarantined from the business risk. Businesses are therefore generally run through companies, unit trusts and related trusts, which are separate legal entities to the proprietors’ personal estates. The more protection that can be provided from personal assets the better. Its not uncommon for a business proprietor to own very few personal assets in their own name.
How can I tell if I meet this item in my business?
You should check to see whether your business is run through a suitable legal entity, such as a company or unit trust, which clearly separates assets owned by the business from assets owned by you in your personal capacity and hence limits the risk of you losing your personal assets. Other more complex structures can also be considered.
What do I need to do to meet this item?
· Make sure you are clear on the structure that is being used to run your business and the reasons why that structure is in place.
· Obtain appropriate accounting, tax and/or legal advice before making any changes.
· If appropriate, transfer your business and/or assets to a more suitable entity, but only after taking the correct professional advice.
· The most important issues in relation to the structuring of legal entities are asset protection, tax minimisation, the cost of implementing the structures and the ease of distribution of profits.
4. Our business structure provides flexibility for the distribution of income earned by the business.
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5. Our significant business assets, for example our business premises, valuable equipment and intellectual property are held in separate legal entities.
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6. We have a well drafted shareholders agreement or other appropriate partnership agreement in place.
Why is this item important?
Most small and medium businesses are run through companies or unit trusts and it’s important to have a shareholders or unitholders agreement, as these agreements complement and clarify any issues which may not be dealt with in the constitution of the company or a unit trust deed. For example, in a shareholders agreement, it’s important to define the roles of the main shareholders or their representatives and also to make provision for remaining shareholders to purchase or take over the shares of a shareholder who may be exiting the company. This is known as a pre-emptive right. Shareholders or unitholders agreements generally deal with an exit from the company voluntarily, or due to the default of a shareholder.
How can I tell if I meet this item in my business?
You should know whether you have a shareholders or unitholders agreement. If you are unsure, you should check with professional advisers such as your accountants or lawyers.
What do I need to do to meet this item?
Obtain appropriate legal, accounting and tax advice and ensure that a shareholders or unitholders agreement is drawn up to deal with your specific circumstances.
7. We have a suitable business succession agreement, which addresses the transfer of a proprietors interest and funding for the transfer, should a proprietor die or become totally and permanently disabled.
Why is this item important?
This agreement is generally known as a Buy/Sell Option Agreement. It is essentially a funding agreement, which requires shareholders or unitholders to take out insurance policies on their lives, or the lives of their principals if the shares/units are held by a corporate entity, to the value of their interest in the entity. If the principal dies or becomes totally and permanently disabled, then the remaining shareholders/unitholders can exercise an option to take over their shares and this is funded by the proceeds of the insurance policy. The remaining shareholders/unitholders therefore don’t need to obtain finance to take over the shares/units.
How can I tell if I meet this item in my business?
You should know whether a Buy/Sell Option Agreement is in place for your company or unit trust. If you are unsure, you should check with your professional advisers.
Sometimes the option process is combined in the main shareholders agreement, but it’s commonplace to have a separate agreement. It may not necessarily be called a Buy/Sell Option Agreement, but would be called some form of business succession agreement.
What do I need to do to meet this item?
· Obtain proper legal advice and ensure that a suitable buy/sell option agreement as drawn up.
· Sometimes such agreements also include a provision to allow an option to be exercised if a proprietor or their principal suffers a trauma event, such as a serious heart attack, which renders them incapable of contributing to the business for an extended period of time. `
8. We are fully compliant with all of our corporate governance obligations.
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