Part
Two - Structure of Borrower
The
structure of the ownership of your personal
assets, trading assets and assets you want
protected, should be well thought out with
a lot of input from your professional advisers.
It
is important that you understand the structure
you have put in place, the reasons behind
your actions and the inter-relationships that
bind them together. The banks will want to
know this information because they will need
to ensure that the assets, cashflow and management
are all tied together to protect their lending.
Sole
Proprietor/Trader
A
Sole trader is an individual who operates
the business in his/her own right, usually
under a trading name. Profit is subject to
personal tax structures and the sole proprietor
is personally liable for all s/he does. There
is no legal difference between Jenny Smith
and Jenny Smith trading as Just Cosmetics
and the banks will treat them the same.
Partnership
A
partnership is when two or more people carry
on business under a trading name. Profit is
subject to personal tax structures and partners
are personally liable for all they do. Lawyers
and Accountants were once restricted to operating
under this structure. As a result of the joint
and several liabilities the partners operated
under, many have now incorporated their business.
Company
Company
structures are a separate legal entity from
the shareholders and directors. They operate
under the Companies' Act 1993. Companies also
have a flat tax rate of 33%.
One
type of ownership structure I believe has
been misused is the Loss Attributing Qualifying
Company or LAQC for short. Basically this
company structure has the ability to transfer
its losses to the shareholders in proportion
to the shareholding percentage ownership.
This is ideal for negatively geared property
investment schemes. It ensures there is no
legal tax differentiation between the company
and personal ownership either alone or with
other investors.
I
have seen this structure used for trading
ventures that are being run with the intention
of making profits. Why then would you give
it LAQC tax status? Banks want to lend to
profitable companies that build retained earnings,
thus strengthening the company balance sheet
and potentially helping the companies' working
capital position.
It
is a big ask of the banks to request them
to lend to companies that appear to have been
set up to make a loss. You don't need to make
it harder than it already is to borrow from
the banks!
Trusts
Trusts
are governed under Trust legislation and are
managed by Trustees for the benefit of the
named beneficiaries. The Government recently
amended the tax charged to the payment to
beneficiaries to a flat 33%. Some exception
still exist so consult with your tax specialist
to establish what would be applicable to your
situation.
