This chapter is an extract from LegalVision’s Online Business Manual. Download the full guide here.
Now that you’ve read about structuring your online business, this chapter will explain how you should own your shares, and what would happen if you wanted to sell your online business.
How Should I Own My Shares in the Company?
If you’ve decided to run your online business through a company structure, you’ve got one last decision to make: how will you own your shares in the company? There are two main options:
- Own them personally; and
- Own them through a discretionary trust
Owning your shares through a discretionary trust is common for tax planning and asset protection.
If you choose to distribute dividends from your online business, or if you sell your business and make a capital gain, a trust can be more tax efficient than owning the shares personally because the trustee has the discretion to distribute the trust income. So, the trustee can distribute to beneficiaries with lower marginal tax rates (e.g. a partner who isn’t working) for tax planning reasons.
In the event of a personal bankruptcy (something all business owners work to avoid), assets owned by a properly-established trust will be, in most circumstances, protected.
Benefits of a Discretionary Trust
- Asset protection from creditors
- Flexibility in distributing income and capital
- Flexible for tax planning
- Beneficiaries of a trust are generally not liable for the trust debts
- Entitled to a discount on capital gains where available
Selling Your Business
If you plan to sell your online business and are operating through a company structure, you can choose to sell via a share sale, or a business (asset) sale. A share sale means that the entity holding the shares in the company — whether an individual or trust — can benefit from the 50% Capital Gains Discount for assets held longer than 12 months.
What is the difference between a share sale and a business (asset) sale?
|Share Sale||Business (Asset Sale)|
|What is being sold||Shares that the seller holds in the trading company which carries out the business.||The business’ key assets such as goodwill, intellectual property, stock, key contracts and client lists.|
|What the purchaser owns||If the purchaser has bought 100% of the shares in the company from the seller, the purchaser owns everything in relation to the company. This includes all of the business’ assets as well as the debts and liabilities the company has incurred.||
The purchaser can choose which assets that it wants to own, and whether it wants to take on any liabilities.
Usually the purchaser will require liabilities over assets to be paid by the seller. The purchaser is not responsible for the business’ debts or liabilities in relation to the period before the sale, and after the sale, is only responsible for debts or liabilities that it agreed to take on.
|What the seller retains||
Unless specifically set out out in the sale agreement, the seller has sold the trading company, which includes all the assets and liabilities in the trading company.
The seller will be required to give detailed warranties about the company. The purchaser can sue the seller if any warranties are incorrect, this is a risk for the seller, the seller needs to make full disclosure of issues, and can negotiate to cap the warranty amount and period.
All assets that were not sold to the purchaser, and all liabilities that the purchaser did not take on. Which liabilities the purchaser will take on, and which liabilities are excluded from the sale, will be negotiated and set out in the sale agreement.
The seller will be required to give warranties about the assets. These are less extensive than for a company (share) sale. The purchaser can sue the seller if any warranties are incorrect. The seller needs to make full disclosure of issues and can negotiate to cap the warranty amount and period.
If you have any questions about owning shares or selling your business, you can contact LegalVision’s online business lawyers by calling 1300 544 755 or filling out the form on this page.
This chapter is an extract from LegalVision’s Online Business Manual. Download the free 53-page manual which includes all chapters and features case studies from NAB, Deliveroo, Airtasker and HubSpot.
This manual covers all the essential topics you need to know about starting your online business, including setting up your online business, protecting your brand, growing your team and scaling your business.
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