Commonly, family agricultural businesses are run by one of three structures:
- a partnership between individuals;
- a trustee of a discretionary trust; or
- a company with shares owned by the trustee of a discretionary trust.
In all cases, major problems can occur when documents relating to the business entity are either missing or never prepared properly.
Partnerships
Many partnerships start between mum and dad and evolve over time to include one or more children. They are probably one of the most popular arrangements for taxation reasons and simplicity, even though they provide little to no asset protection for valuable business assets.
What many people do not consider about partnerships, however, is that section 36 of the Partnership Act 1891 (Qld) provides that:
"Subject to any agreement between the partners, every partnership is dissolved as regards all the partners by the death or insolvency of any partner."
What does this mean? It means that if any one partner dies or is made bankrupt, and there is no agreement between the parties providing a contrary position, the partnership immediately ceases.
If one of the partner dies, it can cause significant problems for the remaining partners as the share of the partnership belonging to the deceased partner will form part of their estate.
This could create liquidity and viability problems for the remaining partners. This issue can be easily avoided by a properly prepared partnership agreement between the partners to the partnership, before such an event occurs.
Discretionary trusts and companies with shares owned by trust entities
Discretionary trusts, and companies with shares owned by a trust structure, are popular business entities because they provide flexibility for taxation purposes and are excellent asset protection structures.
Trust deeds are crucial to the validity of a discretionary trust structure and are not required to be registered (as opposed to a company registration for example). It is therefore important to know where the original trust deed, and any subsequent variations, is held.
Without a trust deed, it will be hard to confirm the trust has been validly established. It will also be difficult to identify who the beneficiaries are, to what extent the trustee is indemnified from trust assets and the powers of the trustee.
Not being able to show clearly that a trust exists may cause big problems if the business is sued (as individuals may be exposed) or if it's necessary to establish the validity of any resolutions made by the trustee, particularly in respect of distributions of income or capital.
In all, it's important to regularly review business structures to ensure:
- that appropriate documentation does exist and can be easily located
- that any existing documentation is up to date and reflects current arrangements.
