Equestrian business structures – As featured in Equestrienne Magazine
Choosing the right structure is one of the most important things you can do when starting and operating an equestrian business. This is an extremely complex area which cannot be completely covered in this article. This article is merely a basic snapshot of the types of structures. There are a number of considerations, and it is recommended that you seek legal advice in conjunction with accounting advice, when determining the right entity for you. Unfortunately, there is no “one size fits all”. Each business and owners’ circumstances are unique.
Why legal and accounting advice?
Whilst a lawyer can advise you on structure and risks, an accountant can provide you with more specific advice from a financial perspective that may include taxation considerations. This article does not delve into the financial or taxation benefits of structures.
What is a legal entity?
This may sound like a simple enough question, but many people get confused by this. A legal entity is an entity that has its own rights and responsibilities. In other words, an entity that has the same rights as a natural person has. E.g. the right to sue and be sued. So when deciding a structure, there must be a legal entity.
This article is touching on the following common business structures:
- Sole trader
There are other structures such as joint ventures and co-operatives that will not be addressed in this article.
How do I choose the correct entity?
There are many considerations when deciding on the best structure for you and your business. It may be that risk protection and financial benefits are two of the most important aspects. As an example, if the business is one that could be high risk (that is a high risk of something going wrong), then risk protection would be a priority and you need an entity that will provide a high level of risk protection. You may also have a separate job which is high risk, and therefore you need to protect your business. Often with high protection, comes further costs and obligations. When you weigh things up, it may be that a high level of protection, which brings more costs and burdens, may not be necessary or desirable.
When deciding on your structure, which we recommend you do in consultation with a lawyer and accountant, you may want to consider whether the following are important to you, or if you may want to avoid them:
- Compliance obligations
- Taxation benefits
Snapshot of the different entity types
This is the simplest structure where one person runs a business as an individual. You can register a business name and apply for an Australian Business Number (ABN).
Pros: Extremely simple to set up and run. There are few reporting obligations, and it is a low-cost structure to run and is easy to control. You can change your structure or wind up the business easily.
Cons: There is no separation between you and the business, and you and your assets are at risk if things go wrong. You cannot disburse profits or share losses with any family members.
Where two or more persons form a partnership to run a business together and share the income or losses of the business.
Pros: The partners don’t pay tax on the income earned (each partner pays tax on their own share). Fairly easy and inexpensive to set up. Minimal compliance obligations.
Cons: A partnership tax return need to be lodged annually. It is moderately complex to set up.
This is a separate legal entity which has the same rights as a natural person.
Pros: As it is its own individual legal entity, your liability is limited (risk protection).
Cons: There are compliance obligations, and it is a more complex structure to set up and run and there are set up and running costs. It also has to lodge its own annual tax return.
There are different types of trusts. A trust is set up with a trustee (which can be an individual or a company) to manage the trust for the benefit of the beneficiaries. So, the additional layer of a trustee is required.
Pros: A trust cannot stand alone as it is not a legal entity, there must be a trustee. Provides a level of asset protection. Flexibility to distribute income or capital amongst beneficiaries.
Cons: Can be complicated and expensive to set up. Can be difficult to change or dissolve. There are some compliance burdens.
Below is a simple table to assist with assessing some of the benefits and burdens of the entities:
|Start up and running costs
|Risk protection level
|Depends on trustee
Business and trading names are exactly that, just names. They are not a legal entity and therefore need to be owned by a legal entity. The legal entity can then trade under the business name.
Start off by deciding what is important to you and how much risk protection you may need. Also, considerations should be given to the potential income of the business as this could help determining any taxations benefits (which an accountant may be able to advise you on).
For example, whilst a company comes with a lot of benefits, such as risk protection and potential taxation benefits, it also comes with set up and running costs as well as compliance obligations. You need to decide whether the benefits outweigh the downside.
Ash is wanting to set up an equine rehabilitation centre on his acreage property. Whilst Ash owns his property, he does not have sufficient funds to set up the business. Due to this, Ash wants to go into business with his best friend, Brad, who can contribute half of the funds needed to set it up to be a lucrative business.
Ash and Brad may want to consider registering a company. This will provide them with a level of risk protection as the business would have risks involved due to the type of business. The company would also allow them to be equal shareholders or commensurate with the amount of funds they contribute to the business. There may also be tax benefits in using a company which an accountant may be able to advise on.
Alice is a single mother of 3 children. She is wanting to earn a little bit of money by offering a rug washing service to local equestrians.
As Alice will only be earning a nominal income from the business, which is low risk, Alice may want to be a sole trader. By being a sole trader there will be less compliance obligations and costs which will assist Alice due to her being time poor and earning only a nominal amount from the business. Alice could also register a business name if she would rather trade under a business name than her own name.
There are so many considerations that cannot all be captured in this article. Every person’s situation and every business is unique. It is important to seek the advice of professionals, a lawyer and an accountant, when deciding on the right structure. It is recommended that you do this prior to starting the business.
Written by Leah Manning of Equilegal
Equilegal is a specialist equine law firm that assists clients in all states and territories of Australia. Equilegal’s Principal, Leah Manning, has 15 years’ experience working professionally with horses in the UK, and 18 years’ experience in law making her the ideal lawyer to assist with equine law matters. Equilegal can assist you with providing legal structuring advice by emailing email@example.com.