Common Business Structures

Oct 23, 2018
Below is a brief overview of the main business structures.

Sole trader

– A business run by one person

– Owner entitled to all profits

– Responsible for all tax/debt

– Not a separate legal entity from business and owner

Partnership

– Partners are jointly liable for debts of the partnership regardless of which partner incurred the obligation

– Two or more people

– Share of profits and losses between partners based on their share

– Partners responsible for their own income tax

– There is no legal requirement to have a formal partnership agreement, however it is recommended to have an official document outlining the expectation of each partner

Equity partnership

– Individuals pool their capital with others in order to gain an ownership interest in a larger property

– Quite often there will also be a component of bank debt as the partners borrow funds to purchase the farm

– Company structure is the most common way equity partnerships are structured

– The managing equity partner benefits from ownership with a reduced level of capital input

– Managers and sharemilkers benefit from an opportunity to progress to full farm ownership

– Retiring farmers benefit from an opportunity to remain involved in the industry

Limited liability company

– The company exists as its own entity – separate from its owners and shareholders

– The company must be formally registered

– The company owns all assets and is responsible for any liabilities/debt

– Profits are distributed to owners by way of dividends

Trust

A trust is an entity whereby selected individuals (trustees) hold and administer assets on behalf of the selected beneficiaries.

– Trustees are liable for the debts of the trust

– Profit is distributed to beneficiaries at the trustees’ discretion

– Losses cannot be passed to beneficiaries

– Trust must be set up formally with a trust deed

Look through company

– Treated as a partnership for tax purposes but a company for accounting purposes