Partnership Kind of Business - Essay Example

Running Head: Taxation Law Name: University: Course: Tutor: Date of Submission: In relation to the scenario there are three business structures which may suit the intentions of the two families thus partnership, private company and trusts. First and foremost is the partnership kind of business structure. From the scenario, the major shareholders of the partnership business will be Goh and Getup families. As far as partners are concerned assumption is going to be made that Goh’s child currently working as a casual worker earning $ 4,000 per annum will quit the job and become a partner in the business. Partnership kind of business between the families will suit the business intentions of the two families. Another assumption is that the Gettup’s three adolescent children will grow and become partners in the business as well as the other child of Goh once they reach a legal age of eighteen years. A partnership is defined as the contractual relationship between persons carrying on a business with a common view of making profit (Barkoczy, 2011, pp.20-80). Asset protection is very important in this kind of business structure. Asset protection actually is term which describes the methods available to protect assets from liabilities (Barkoczy, 2011,pp.20-80). In this kind of business structure, partners are general liable and responsible for the most of decision making process as well as asset protection. Asset protection actually varies depending on the nature of partnership. In limited partnerships, all the partners are responsible for the decision making process as well as running the day-to-day activities of the company. Limited partners own a percentage of the company proportional to their financial investments in the business hence their decision making capabilities are limited. Limited partners actually have a limited liability as well as lower amount of personal and financial responsibility for the debts of the business. Given the mere fact that limited partners invests in the business in relation to their contributed amount, their personal liability for the business debts is equal to their contribution hence they usually enjoy full asset protection(Barkoczy, 2011,pp.20-80) On other hand, general partners have unlimited liability for any debts incurred by the business. This therefore implies that incase a legal action is taken against the business in situations where the company is found to be at fault, the personal assets of general partners is subject to liquidation. General partners therefore have a responsibility of protecting their individual assets through the creation of either a corporation limited liability partnership (Barkoczy, 2011,pp.20-80).. The two families therefore should consider setting up a limited liability kind of partnership which is seen as separate legal entities and therefore reduce the liability of the general partners. Tax minimization is another advantage of this kind of business structure. A partnership actually is a relationship between two or more persons jointly doing business with each person contributing money, property labor, skills with an expectation of profits and loss sharing. A partnership therefore is not a separate legal entity and not a taxable entity. Though, partnership kind of business is not taxable, it is a requirement for a partnership business structure to fill annual information return to report the income, deductions, gains and losses among other items to its partners(Barkoczy, 2011,pp.20-80). Management, administration as well as running of a partnership kind of business is usually easy given the mere fact that the business operates under a written agreement that guides the business when it comes to the formulation of the profit and loss sharing plans. Management is thus easier as more complementary ideas are given by the parties in the partnership with greater skill and knowledge. The other advantage of partnership is the mere fact that they are relatively easy to establish (Miller & Gaylord, 2008, pp.23-50).Contribution of capital is another advantage for this kind of business structure. Moreover, partnerships are cost-effective as each partner specializes in certain aspects of their business. Lastly, partnerships kind of business structures tends to provide moral support hence allowing creative brainstorming especially in critical problem solving situation as well as decision making process. Though, partnerships have advantages they do have disadvantages too. The first disadvantage of this kind of business structure is the mere fact that business partners are jointly and individually liable for the actions of other partners in the business (Cossa, 2009,pp.23). Secondly, profits as well as losses are shared hence its always difficult to value each partner’s time and skills contribution to the business especially in situations where a partner contributes little time to the business as result of personal circumstances Since decisions are shared its quiet evident that disagreements are bound to occur in the process making the decision making process even slower (Emerson, 2009, pp.12-20). Partnerships have a limited life especially in the event of death or withdrawal of a partner. Unlimited liability is another disadvantage thus all partners in a partnership are liable without any limit to all the debt contracted by the business as well as the errors the business incurs. This makes partnerships to risky if the capital involved is too small (Miller, 2009, pp.34-56). The second form of business structure which will suit the two families is trust. A trust is an equitable obligation binding the trustee to deal with trust property of which they are the legal owner for the benefit of the beneficiaries of the trust (Emerson, 2009,pp.12-20) .Trust actually can be described as a contract between individual’s wishing to protect their own personal assets. There are different categories of trust the fixed trust where beneficiaries’ right to income is fixed by the trust deed. Discretionary trust where the beneficiaries have no right to income until the trustee exercises discretion in their favour. In discretion trust, the trustee is said to have the discretion advantage over the amount of the income to the beneficiaries due to its seen flexibility (Emerson, 2009, pp.12-20).Unit trust is a form of fixed trust in which the beneficial interest in the trust property and income is divided into units and is fixed, units can be transferred. The contract involves two parties thus the Grantor an individual who wishes to protect his asset and the trustee concerned with the management of the assets for the benefit of all Beneficiaries which may include the Grantor, his spouse, children and grandchildren. Assets protection is usually the primary goal for this kind of business structure (Calrke, 2007, pp.89).The basic function of a trust is to separate control and ownership resulting in proper asset protection and proper asset distribution. This kind of business structure provides flexibility when it comes to assets and income distribution. Income is usually distributed to the lower income earners, assets are fully protected as well as wealth is usually passed into the next generation with minimal fuss and little or no tax(Emerson, 2009,pp.12-20). In a trust kind of business structure, the trustee has no legal control over the assets, though he or she can buy, sell an asset but never enjoy the benefits of ownership such as income or usage. This is because only the trustee’s name is required to appear on all legal documents, bank accounts among others. In case of a trust Goh and Gettup families should consider putting up a trust of their own for them to have both legal control and beneficial ownership(Emerson, 2009,pp.12-20). Reduced liability is another advantage of trusts in situations where the established trust is a corporate trust.   Unit trust does not need to pay tax rather the unit holders incur the tax on taxable profits derived by the unit trust. The advantage is the benefit of tax free capital gains and tax incentives may be passed through to the unit holders provided that appropriate structuring is undertaken. Trusts have disadvantages just like another form of business structure (Emerson, 2009, pp.12-20). Firstly, they are expensive to establish and administer since they require a huge amount of capital. Management of trusts is hard given their complex nature in reality they are difficult to dissolve, dismantle as well as make changes once established if the children are involved. Any retained profits required to be reinvested into the business are likely to incur penalty tax rates. In addition, unlike partnerships profits as well as losses cannot be shared (Faxton, 2007, pp.34-45). In case of a company the family will be obliged to go for a private company since it involves only family members. According to s 995-1 ITAA1997,a company is defined as a means a body corporate or any other unincorporated association or body of persons but does not include a partnership(Emerson, 2009,pp.12-20).Private companies in most cases are usually subject to additional anti-avoidance provisions (Salanie,2003,pp.56). The main advantage of companies is the aspect of limited liability thus it protects asset protection to its oners.Since a company is usually considered as a separate legal entity its shareholders have a limited liability for the corporations debts and errors(Barkoczy, 2011,pp.20-80). The personal assets of the shareholders is safeguarded thus they cannot be sold to pay of the debts as incase of a partnership. In terms of management is easy to manage a company since it’s a combination of various individuals with skills and knowledge. Corporations have a set of management structure which is usually difficult to administer especially in situations of decision making process. The owners of the corporation are usually the shareholders who in the case will be Goh and Gettup families who have the responsibility of electing Board of Directors, which then elects the officers(Barkoczy, 2011,pp.20-80). The main function of the board of directors is to manage and exercise the rights as well as responsibilities of the corporation. Companies are usually taxed at a flat rate of 30% given the mere fact that it is a separate legal entity it pays taxes separately from its owners. In case of company owners of the company are obliged to pay taxes on corporate profits paid to them in form of salaries, bonuses and dividends(Barkoczy, 2011,pp.20-80). Unlike in partnership, company losses are not distributed to the shareholders and the losses are therefore be carried forward indefinitely. Question two Taxation of companies According to Taxation laws a company is a separate legal entity as well as a taxpayer by itself. The tax of any company for any given financial year is usually based on the taxable income derived in the previous income year ( s 4-10(2)). In relation to s 23 Income Tax Rates Act 1986 private or public company is subject to a flat tax rate of 30%. Since the Goh and Get up private company is still new we assume that during the first year no dividends will be distributed to the two shareholders thus no taxation for the dividends. Assuming Net Profit of $ 200,000 Taxation at 30% will be $ 200,000x30%=$60,000 100% Total tax will be $ 60,000 Net Profit after Tax will be $ 200,000-60,000=$140,000 Trusts According to the Taxation rules of trust incomes s 95-102 ITAA1936, A trust is not a separate legal entity and not a taxable entity though the trustee is required to furnish annual return of trust income and its distribution (form T) “net income” of a trust means the total assessable income of the trust calculate as if the trustee was a resident taxpayer, less all deductions. Under trust there are rules for the Taxation of unearned eligible income of minors. Minors are those under the age of 18 years. Assuming that four adolescents of the two families earn an income of between $417 - $1,307 from the family trust it will be taxed at the rate of 66% for the amount in excess of 416 Let Assume a flat rate figure of $ 800 dollars for the four Taxation of minor eligible income will be as follows; $800x66% = $528 100% Partnerships A partnership is not a separate legal entity and not a taxable entity. A partnership is only required to furnish an annual return (form P) showing distribution of partnership net income or loss to partners. The $ 200,000 annual income will not be taxed rather the partners will be taxed individually. Conclusions Since the business involves two families the best structure for this family is partnership kind of business structure in particular family limited partnership. The type of business partnership structure which should be considered is a family limited partnership which is a special designed limited kind of partnership made by two or more general partners and one or more limited partners(Barkoczy, 2011,pp.20-80). In this kind of partnership, the general partners are responsible for managing partnership affairs while the limited partners on other hand have no management rights. In relation to the above scenario, the Goh and Gettup families will be named as general partners while their children will be named as limited partners. Under this kind of partnership asset protection is an issue of concern since it allows an individual to maintain full control and enjoyment of his property while divesting himself or her of legal ownership. A partnership is not a separate legal entity and not a taxable entity which actually will help the two business partners in the issue of tax minimization as well as administration. Lastly, partnerships unlike a company does not require huge capital to establish in relation to the assets owned by the two families as well as the amount in cash it suit partnership kind of business. References Anne, M., L (2005).Taxation: an interdisciplinary approach to research.New York: Oxford University Press, pp.23-30 Barkoczy, S (2011)."Foundation of taxation law", 3rd Edition. New York: Wiley and Sons, pp.34-56 Block, C (2004).Corporate taxation: examples and explanations.3ed.Publisher:Aspen Publishers Online, pp.78-80 Calrke, T (2007).International corporate governance: a comparative approach.Publisher:Routledge,pp.89 Cossa, L (2009).Taxation: its principles and methods.Micgigan:PublisherG. P. Putnam's sons,pp.23 Emerson, R., W (2009).Business Law.5th ed. Publisher:Barron's Educational Series, pp.12-20 Faxton, R (2007).Taxation: a problem.Publisher: Boston News Bureau Company, pp.34-45 Melville, A (2009).Taxation. Chicago: Prentice Hall, pp.45-78 Miller, R (2009).Fundamentals of Business.2ed.New York:Cengage Learning, pp.34-56 Miller, R., L & Gaylord, C., A (2008).Essentials of the legal business environment.2nd ed.Publisher:Cengage Learning, pp.23-30 Salanie, B (2003).The economics of taxation.Chicago:MIT Press, pp.56   Read More