Business Corporate Structures
Although most of you will understand the different franchise business structures, I do find it’s really good to revisit the terminology and why you have things in place that you have.
When it comes to structuring, there are some common terms which come up and each of these represent some type of structure for running a business or for holding assets.
First the most basic is a Sole trader, somebody in business in their own name. They might register a business name but the are trading as themselves, as an individual.
Then we have a Partnership – two or more people or other types of entities such as companies or Trusts. A partnership of two Trusts that’s a reasonable and common structure or it has been over the years.
Then we get into some terms that specifically relate to companies. Directors and shareholders I think would be fairly commonly understood when it comes to business structures. Directors being those who manage the business on a day to day basis and the shareholders being those who have ownership and get a return from the business.
In a Trust there are four key roles.
The first role is the Settlor, the Settlor I sometimes describe as the generous person who puts down the first $10 to start out a Trust. Trusts go back to old English law and have been used for example by grandparents establishing funds for grandchildren or other particular purpose. They have become a very popular business structure in Australia in particular because of tax flexibility amongst other reasons.
So the Settlor is always somebody who is independent of the family, the business owner, those who are involved in the business. It is quite commonly an accountant, a lawyer or somebody completely uninvolved in the business
Then there is the Trustee, a Trustee is a very important role because this is the person or people who manage the business on a day to day basis.
A Trustee can be an individual, more than one individual or a company. It can be a common scenario in business structures to have a company as Trustee for a Trust.
Then of course where there is a company, there are going to be Directors of that company. Directors manage the business that is owned by the Trust.
Next, alongside the Settlor and Trustee, there is the Appointor, sometimes also known as the Principal. The Appointor has the ultimate control, they tend to be silent in the background and quite often they are the same person as the Trustee but not always. The Appointor has really only one key power but it’s the ultimate power they have – the ability to hire and fire the Trustee. Most of the time this power does not come into play, and even though it is not often used, it is particularly important in setting up a Trust to think about who should be the Appointor, because when it comes to events we hope don’t happen like bankruptcy or the death of the Trustee, then the role of Appointor is crucial in terms of who takes over the management of the Trust.
To just get into more deeply into bankruptcy side of things, if a person goes into a personal bankruptcy and they are the Appointor of a Trust which has assets, the assets are at risk. If we know a little about this, we probably tend to think that assets in a Trust are protected from personal bankruptcy. But in a backdoor way, the Trust assets can be accessed if the person whose becomes bankrupt is the Appointor because, then the Trustee in takes over the Appointor role because they take over the financial affairs of the bankrupt person. And because they become the Appointor they can appoint themselves as the Trustee and then by virtue of being the Trustee they can distribute assets to the bankrupt person and as a result, the assets are all exposed to the creditors.
So, for that reason it is very important to consider who will become Appointor.
A solution is to have two people as an Appointor because if one goes into bankruptcy then the Trustee in bankruptcy does not have ultimate control. At best they are 50/50 control with the Appointor.
The last type of person in a Trust is the Beneficiary. The Beneficiary receives the benefits of the Trust. There a different types of Trust. In some cases, Beneficiaries have a fixed entitlement to the profits or the assets of the Trust. In other cases it’s at the discretion of the Trustee where the Beneficiaries have a right to be considered for a distribution of profits or assets but not a guaranteed right. Quite often, in what we know as family Trusts, the range of potential Beneficiaries is very wide. Its often the business owner, or owners, children or grandchildren and even wider than that.
Finally, there is a Unit Trust. In some Trusts, Beneficiaries do have a fixed entitlement, a little bit like shares in a company, and that is a Unit Trust as distinct from Family Trust or Discretionary Trust which are more flexible.