What Is the Best Structure for a Family Business?

Determining what is the best structure for a family business depends on many factors. Here are the key things to consider…

From breweries to barbers, real estate agencies to restaurants, family businesses are prolific in Australia.

In fact, there are more than 1.4 million of them, accounting for roughly 70% of all businesses in this country.

It’s with good reason. There are plenty of upsides and rewards to running a family venture.

But romanticism must meet reality. Running a family business—or any business for that matter—is complex, and it demands protection.

That complexity and protection begins with choosing the right structure. 

The structure of your family business impacts anything from taxes and legal liabilities to ownership and decision-making. 

It shapes your business’ strategy—how it operates, grows, and then transitions to the next generation. 

So, having the best structure in place is imperative to ensuring the long-term success of your set-up and for maintaining family harmony.

In this article, we delve into the various structures—with a brief outline of their pros and cons—and detail the key factors to consider when it comes to choosing the right foundation for you.

What Are the 4 Types of Business Structures: Australia?

In Australia, there are four common types of business structures. They are:

• Sole trader
• Partnership
• Company
• Trust

Here is a breakdown of the quartet…

Sole Trader

As the name suggests, a sole trader is an individual who operates a business on their own. This structure is the simplest and most common form of business ownership in Australia. 

Sole traders are personally responsible for all aspects of the enterprise, including finances, liabilities, and decision-making.

Yes, a family business can be a sole proprietorship—as long as only one family member is the owner of the entire business.

In this case, the nominated family member has full control of and responsibility for the business’ operations and finances. It also means they are personally liable for any debts or legal obligations incurred by the business.

Pros:

• Simple and inexpensive to establish and operate
• Complete control over the business and its profits
• Minimal reporting requirements

Cons:

• Unlimited personal liability for business debts and obligations
• Limited capacity to raise capital
• Potential difficulty in transferring ownership

Partnership

A partnership allows two or more individuals to share ownership and management responsibilities of a business. 

It’s a flexible structure that allows family members to combine their resources and expertise.

Partnerships are governed by a partnership agreement, which outlines the rights, obligations, and profit-sharing arrangements among its partners.

This collaborative structure comes with shared liabilities, so clear communication and agreements are crucial.

Pros:

• Shared decision-making and workload
• Enhanced access to capital and resources and greater borrowing capacity
• Potential for tax benefits through income splitting

Cons:

• Unlimited liability for all partners
• Greater risk of disputes and conflicts arising between partners
• Can be a costly process to value assets if partners join or leave 

Company

A company is a separate legal entity from its owners, known as shareholders. 

This set-up provides limited liability protection to shareholders, meaning their personal assets are typically not at risk for the company’s debts or liabilities. 

A company structure typically suits larger family enterprises with strong ambitions for growth and expansion. 

However, it does involve stricter regulatory requirements and compliance and more administrative tasks and reporting obligations compared to other structures.

Pros:

• Limited liability protects personal assets from business debts
• Easier access to capital via the sale of shares
• Perpetual existence independent of changes in ownership

Cons:

• More complicated and costly to establish and maintain
• Stricter regulatory requirements and enhanced reporting obligations
• Less flexibility in decision-making due to corporate governance structures

Trust

Trust structures offer flexibility in asset management, tax planning, and succession. 

They’re often favoured by family ventures looking to safeguard assets, facilitate wealth transfer, and provide for future generations. 

While there are different types of trusts, discretionary trusts are the most common form when it comes to running a family business.

Establishing and managing a trust can be complex, so professional advice is highly recommended.

Pros:

• Asset protection and tax-planning opportunities
• Flexible distribution of income and assets among family members
• Can provide for succession planning and wealth preservation

Cons:

• Complexity in setup and administration (professional assistance required)
• Limited capacity to retain profits within the trust
• Potential for conflicts among beneficiaries

Best Structure for a Family Business—What to Consider

Choosing the best structure for your family business clearly is not straightforward—and there’s no one-size-fits-all answer.

As a starting point, consider the following factors:

• Size and scale of your business
• Level of risk tolerance you’re comfortable with
• Various tax implications of each structure
• Long-term plans for growth and succession
• Ownership and decision-making dynamics 

What Is the Best Structure for a Family Business?—Summary

Deciding on the best structure for your family business demands careful consideration of your unique circumstances and preferences, goals, risk tolerance, and future plans. 

It’s critical to take the time to make the right choice.

The structure lays the foundation for your family business’ success and longevity, while the wrong choice could lead to unnecessary risks and challenges ‘down the road’. 

Expert Advice With Business Structures

Are you trying to wrap your head around what is the best structure for your family business?

At PrimeAdvisory, we can help with that.

Send an email or call us on +61 02 9415 1511.

Let’s see what’s possible.