There are basically four different structures that a family business will operate under:
- Sole Trader
A Company is the most common business structure in Australia and is prevalent for start-ups right through to large businesses. It is a separate legal entity from the shareholders and provides protection to the shareholders if the business becomes insolvent. It is incorporated pursuant to the Corporations Act 2001 and is a good vehicle if you want to seek investors. It is advisable to have a shareholder’s agreement to govern the behaviour and expectations of all the shareholders. Companies can be expensive to set up and there are significant ongoing costs to administer and regulate it.
A Partnership is made up of two or more people who run the business and they are jointly and severally liable. It is not a separate legal entity as each partner owns the business asset but are also responsible for the liabilities unless it is a limited liability partnership. They are generally cheaper to set up and to run.
A Sole Trader is the simplest structure and is a single person trading on their own where the money generated is taxed as personal income. This makes the person personally liable and is not a suitable vehicle if you want to grow the business. It is inexpensive to set up and to run.
A Trust is a structure where a trustee holds the business on trust for the beneficiaries. The trust is governed by a trust deed and the trustee will distribute the income. A trust will reduce personal liability if the trustee is a company and enables flexibility in tax planning. It can be expensive to set up and administer.
The keys to a successful family business
In my experience there are certain elements that make a family business successful, and they are:
- Having trusted advisors who not only understand the business but are willing to collaboratively and work to guide the business during growth and through decision making processes.
- Communication whether it be between the family members and/or employees is paramount and encourages transparency and the free flow of ideas and innovation.
- Guidelines and rules around the employment of family members which should cover remuneration, duties, and their obligations to the business. It should always be remembered that a job in a family business is a privilege, not a right.
- Entry and Exit conditions for the business should be clearly outlined.
- Having a Plan which outlines the goals and aspirations of the business. The plan should be strategic and cover both short and long term objectives. Any plans should be documented in writing and become a living part of the business.
- Separating “home” and “work” life and ensure personal issues do not affect the business.
- Having a succession plan and make sure every family member is very clear how the business ownership will be passed on. It is important that there are both short and long term plans in place together with contingency plans for unexpected issues which may arise.
Tips for succession planning in a family business
Succession planning for a family business is often one of the biggest challenges that members can face.
It is very important that any succession plan should:
- Have buy in from the family members
- Clearly outline the businesses values and ethos
- Openly discuss the process and expectations
- Ensure key non family employees are engaged and not isolated
- Have a pathway to have the family members integrate into and learn the business
- Begin the process early and don’t be afraid to regularly review the process
- Get independent advice and engage your key advisors such as your lawyer, accountant, business mentors/coaches
- Set high standards of behaviour and ensure the right talent is available in your business or plan to get those people into the business
- Set aside time for the process
- Have a key document in place which defines the above
How can FC Lawyers help?
Our expert team of business and corporate lawyers have assisted hundreds of family businesses both large and small with all their structuring and succession issues.
Contact us for an obligation-free discussion on how best we can assist you.
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