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Start-up legal basics: Getting the right structure – Page 2 of 2 – StartupSmart

From SME to behemoth – company

 

A company is a legal entity that is separate from its shareholders or members. The shareholders are therefore not liable for the liabilities and losses of the company. This protects the assets of the shareholders.

 

A company is a more complex, and consequently more expensive, way of structuring your business compared to a sole trader or partnership structure. There are initial establishment costs, regulatory costs (e.g. annual fees payable to ASIC) and compliance costs (e.g. accounting and other expenses relating to tax reporting).

 

Incorporating is, however, the best way to go if you’re building a business that is going to take on liabilities, employees or investors. A company is a flexible structure which allows you to raise capital easily and ensures you are not personally liable for your businesses debts.

 

The additional costs and complexity of setting up and running a company are heavily outweighed by its benefits.

 

Reduce taxes and protect yourself – family/discretionary trust

 

When launching a start-up which you’re aiming to build into a multimillion dollar company, it’s also a great idea to set up a discretionary or family trust.

 

A discretionary trust is a trust in which the trust fund is held by a trustee and administered in accordance with the terms of a trust deed. In each financial year, the trustee determines which beneficiaries (if any) will receive distributions of income and/or capital from the trust, and in what proportions.

 

Using a trust to hold shares in your company is a great option for a few reasons. The first relates to tax.

 

If you end up selling your start-up to Google for $10m you will receive an extremely large windfall over one or two financial years.

 

If you hold shares in your company personally, your tax bill will be immense given the top marginal rate in Australia is 45%. Holding your shares through a trust structure allows your clever accountant to significantly reduce your tax liability.

 

Secondly, using a trust structure will reduce the risks associated with being a director of a company.

 

Although it is unusual for a company director to be sued, it is not unheard of. If you set up a family trust and transfer all of your assets into it (including your shares in your company), suing you becomes a thankless task; you are penniless!

 

Future-proofing

 

Before you get into the details of product and marketing strategies it is crucial that you think about your company structure. Choose the structure that will work for you now, but more importantly, make sure it will work in the years to come.

 

Lachlan McKnight is the chief executive of LegalVision, a start-up that provides SMEs with access to online legal services, including customised legal documents.

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