An investment structure refers to the way your investments are legally owned.
Business owners have unique circumstances and thereby need a tailor-made investment structure that suits them. Most businesses are owned as a proprietor or partnership, whereas other ownership structures may be more suitable.
There cannot be a ‘straight-jacket’ approach to investments. Getting it right can have long term benefits and getting it wrong can be a disaster. What is important is to consider how you will own the investment.
When setting up investment structures consider asset protection, flexibility, effective taxation outcomes, ownership and control. Ask yourself – who should receive the income/the capital, do you need protection against future creditors, any special family considerations now or in future, flexibility of debt and leverage and finally tax implications of investments.
There are four basic types of investment structure, each has its own pros and cons as below:
Individuals – PRO – Holding investments in your own name. Easy to set up, manage and has tax advantage if the investment is the family home. CON – Less flexible and no protection for owner’s personal assets in case of debt.
Partnerships – PRO – Separate entity for taxation purposes. Easy to setup and manage. CON – No risk protection in a partnership as the assets of either partner may be subject to a claim by a creditor as all partners are jointly and severally liable.
Companies – PRO – Benefit of tax rate on profit is 30% and offers protection for shareholders if business fails or is sued. CON – High cost of setup and needs to maintain separate set of accounts and tax return each year.
Trust – PRO – Depending on which type of trust is set up this can be most flexible and the tax payable could be between 15% – 30%. E.g. Superannuation funds are also a type of trust and are an investment vehicle which can be used to contain investments, purchased with you super contributions. CON – Care needs to be taken when establishing such a structure as not all trust deeds are adequate to allow the individual to claim the tax deduction for expenses.
And finally, it all comes down to your research and your objectives for investments.