Thursday, 10 June 2021

B114
Module 5: BUSINESS STRUCTURES
Part C: Companies, Trusts and Maori enterprises
Module 5 Learning Outcomes

Upon successful completion of this module, you will be able to:

LO1: Describe the advantages and disadvantages of different types of businesses

structures
LO2: Identify the relevant considerations when determining a suitable business structure in
various scenarios
LO3: Recommend a suitable business structure for a business enterprise

2
Structures based on artificial legal persons
These structures are called corporations.

Definition:

“A group of individuals… deemed in law to be a single entity…

The corporate entity is legally distinct from all the individuals who
compose it, has legal personality in itself and can accordingly sue
and be sued, hold property and transact, incur liability, and
generally act as if it were a natural person.”
Q. In what way is a corporate person different from a natural person?

3
Separate legal personality

Fundamental feature of a corporation

➢ separate legal personality

Q. What does this mean?

Various types of corporations:

• A company, created under the Companies Act 1993
• An incorporated society, set up under the The Incorporated Societies Act 1908
• Corporations set up under a special statute
(eg. Universities s.162 of the Education Act 1989)

4
Salomon v Salomon

Foundation case on the concept of separate corporate personality:

Salomon v Salomon [1897] AC 22 (HL)

The House of Lords (UK) determined that:

“…a company is at law an entirely different person altogether

from [its shareholders] although it may be that after incorporation
the business is precisely the same as it was before,
and the same hands receive the same profits,
the company is not at law the agent of the [shareholders].”

5
Key features of a company

Separation of ownership and control:

• shareholders / directors / management

• limited liability
• separate legal entity
• perpetual succession
• act through human agents (management)

6
Advantages of the Corporate Form for
Business
• Perpetual succession of the company – the business can continue despite the death or
incapacity of shareholders or directors or managers

• Limited liability – the liability of shareholders is limited to the share capital – encourages
investment without say in management

• The assets and liabilities of the company are separate from those of shareholders or directors

o bankruptcy of shareholder or director does not require liquidation of company or the

disruption of the company’s business
• Ease of investment and divestment through the transfer of shares – (larger companies at
least)

o ease of growth of scale of operations – through the issue of shares to many investors

7
Advantages of the Corporate Form for
Business cont…
• Management under a board structure

o separation of ‘ownership’ and control

o employment of professional managers
o (not usually the reality of small companies)
• Incorporation may facilitate borrowing

– in small companies creditors may demand personal guarantees from directors / personal
property as security
• Exposure to taxation and regulation requirements specific to companies

• Incorporation is necessarily attended with formalities, loss of privacy and expense greater
than that which would normally apply to a sole trader or partnership
8
Trusts
NOT a separate legal entity but a “bundle of property rights”

Allows splitting legal and equitable/beneficial ownership interests/property

3 parties to trust: Trustee (Trustees are the legal owners)

Settlor Beneficiary
(Beneficiaries are equitable/beneficial owners)
A trust is generally established under a Trust Deed.

9
Parties to a Trust
Trustee looks after
property for the
Settlor beneficiary/beneficiaries
TRUSTEE

TRUST

Beneficiary Beneficiary

10
Keech v Sandford

Lease for Market

Held on Trust
Mr Sandford
Trustee

Keech
(Beneficiary)
• Lease (profitable) held on Trust
• Mr Sandford = trustee
• Landlord wouldn’t renew lease to Trust
• Mr Sandford took lease in his own name and started making profits
• Keech (beneficiary) sued Mr Sandford
• Court orders Sandford to give Keech all his profits (= account of profits)
Trustees

• Can have more than one trustee

• Do not need to be human eg. corporate trustee may be used

• Owe fiduciary duties to the beneficiaries; see eg Keech v Sandford

• Hold legal title to the property

• Control and are responsible for the trust property (eg payment of rates on trust real
property)

• Must follow the terms of Trust Deed

• Trusts not separate legal entity (unlike companies)

o eg assets owned and debts incurred by trustees personally

o but separate entity for tax purposes

Beneficiaries
• Enjoy fruits of the property ie the income, capital and other benefits

• Must pay their own taxes

o eg on bank interest or dividends from shares held by the trusts and

distributed to the beneficiaries

• Interests of beneficiaries survive insolvency of the trustee(s)

o assets held on trust by trustee cannot be taken by the Official

Assignee to pay the trustees’ debts

• Trustee should not be only beneficiary; one solution:

o Appoint a non-beneficiary trustee

o eg John Smith and Mary Smith and Fred Clever (the family
accountant) - as trustees of the Smith Family Trust
Settlor

• Settlor is person(s) who establishes or “settles” trust

• Settlor gives up right to control assets to the trustees

• Settlor do not have to be involved with trust once assets

transferred; but:

o can also be a trustee and/or a beneficiary

o can retain the power to appoint future trustees

Creation of a trust
How
• Intentional express trusts created by Deed or by a Will
o an Inter vivos trust - set up while settlor alive – generally established by a Deed (Trust
Deed)
o a testamentary trust under Will
• Trusts implied or presumed by the Court - eg where breach of fiduciary duty
• Trusts created by legislation – eg see s 123 Real Estate Agents Act 2008

The 3 certainties of an express trust (s 15 Trusts Act 2019)

An express trust can…. by a settlor who “clearly and with reasonable certainty”:
• indicates and intention to settle a trust
• identifies the beneficiaries (objects) or purposes of the trust, and
• identifies the trust property (subject matter).

Note: the “3 certainties” were always part of the common law even before the Trusts Act 2021
15
Content of a Trust Deed

Content of Deed/Will
• Names of trustees and how replacement ones appointed

• Trust property

• Management/investment powers of trustees (Trusts Act 2021 has default rules)

• How income/capital distributed (discretionary vs fixed trust)

• Duration of trust

16
Trust Act 2021

• Comes into force 30 January 2021

• Clarifies and modernises existing trust law (previously much of was based on case law)

• The Act puts into law the duties of trustees and requires much greater transparency around
trust activity.

• Applies to all express trusts

• The Act is not a complete code. It will co-exist with relevant rules of common law and equity.

• Guiding principles (s4) - A trust should be administered in a way that:

o is consistent with its terms and objectives; and
o avoids unnecessary cost and complexity.

17
Trust as a vehicle for holding family
property/investments
• Share family assets between family members

• “Discretionary” trust allows discretions as to which family members benefit

according to need, tax consequences, etc
• Protects assets from spendthrift son/daughter - yet son/daughter can still benefit:
ie, they can get the benefit but not the control of the assets

• Protect assets from sons’/daughters’ future spouses or relationship partners

• Allows inter-generational family, tax and estate planning

• Protection from creditors (subject to exceptions discussed further)

18
Trading Trust

A trust that operates a business

Settlor – sets up the trust and its terms

o often uses a corporate trustee ie. a company acting as the trustee

Trustee – similar to the directors of a company

Beneficiary – similar to the shareholders of a company

19
What is a trading trust?

• A trust can be used as a business structure

o A trust can own shares in a company which trades
o A trust can trade itself – the trading trust

• The assets are legally owned by the trustee company but beneficially owned by the
beneficiaries
• Trust is not separate legal personality so creditors contract with trustee company
• The trustee company trades and incurs debts
• The trustee has a right to indemnity out of the assets of the trust in respect of debts it
properly incurs

20
Protect assets from creditors
• To protect assets from creditors
• The assets of a trust are separate from your own assets so should not be available to meet
your personal debts and of course particularly in an insolvency.
• You can therefore gift assets (including money) to the trust and the trust may increase its
value by increases in the assets it owns or trading profitably
• Until 1 October 2011, could only gift up to $27,000 a year without incurring gift duty (ie, tax)
but from 1 October 2011 gift duty has been abolished.
• Depending on the circumstances, using for this purpose may or may not be ethical and may
be challenged by creditors under various laws:
o your business is failing so you transfer all your assets to a trust so your creditors do not
get paid; or
o before you start a business with a high risk of personal liability for negligence, you
transfer your assets to a trust.
• NB: Abuse of trusts is controlled by legislation
21
Income Tax Planning

It is possible for taxpayers to organise their affairs in a way that will legitimately minimise the
tax they are obliged to pay.

For example: income splitting

by holding an income producing asset in a trust so that the income is received by trustees or
beneficiaries who are taxed at a lower rate than the main breadwinner: eg holding a rental
property in a trust for a spouse who earns little other income

22
Maori Business Structures – useful resources

The Maori economy

https://www.mbie.govt.nz/dmsdocument/1051-maori-economy-investor-guide-pdf
- note dated June 2017

Te Puni Kokiri – Ministry of Maori Development

https://www.tpk.govt.nz/en

23
Maori economy - snapshot

• Over 20+ years Maori authorities and enterprises have negotiated almost $2b in assets and
financial redress via Treat settlements. These assets have grown approximately 10-15% every
year.

• Maori economy contributed $12b to NZ’s GDP in 2015

• Maori own approximately 50% of NZ’s fishing quota

• Maori own $13b in primary sector assets

• 1.4m ha of land in NZ is Maori registered land, owned by Maori authorities, enterprises and
individuals

24
Māori Land
• The Te Ture Whenua Māori Act 1993 (TTWMA)

Q: What is Maori land?

s.129 TTWMA https://www.legislation.govt.nz/act/public/1993/0004/latest/DLM291287.html

• Maori Land Court

o provides a court service for owners of Māori land, their whānau and their hapū which:
▪ promotes the retention and use of Māori land
▪ facilitates the occupation, development and use of that land.

• Maori Land Trusts (include)

o share-based trusts
o land based trusts

• Maori incorporations: land-based corporate structures

25
Māori Trusts
TTWMA Part 12

Maori Land Trusts (include)

• share-based trusts
o whanau trusts (family based trusts)
o putea trusts (small interests are combined)

• Land-based trusts
o Ahu whenua trust (most common, often used for commercial purposes)
o Whenua Topu trust (iwi or hapu based)
o Maori reservations

Ahu whenua and whenua topu trusts are for the promotion and use of the land for the
benefit of the owners / iwi or hapu.
26
Māori Incorporations
TTWMA Part 13

• Similar to a company
• Can be established over any Maori land
• Owners have the ability to apply to the Māori Land Court to incorporate.
• The legal estate in fee simple (freehold) is vested in the incorporation (a body corporate).
The incorporation is governed by a Committee of Management elected by the shareholders.
• TTWMA provides that the incorporation shall hold the land and other assets vested in it on
trust for the owners.
• Some of the largest Māori land entities by land size and asset base are Māori incorporations –
160 in total.
27
Significant iwi-based businesses

Ngai Tahu Tainui

• Tourism • Farming
• Property • Hotels
• Seafood • Forestry
• Farming • Property

Tainui 2020 Annual Report

https://waikatotainui.com/wp-
content/uploads/2020/11/2020-Waikato-Tainui-
Annual-Report-Final-Low-Res.pdf

28