Task

Mark and Steve decide to establish their own property development business. It is to have two separate divisions:

Development business: A development arm to conduct the building and development business. It employs various trades, engineers, consultants, architects and themselves in the business. This development business involves considerable potential rewards, although the risk of downside on a year-by-year and project-by-project basis is significant. Due to the tightening insurance market, no professional indemnity insurance is available for these activities. They will commence business on a low overhead cost basis.

Land banking: It will purchase development land and investment properties. It is likely that this second division will involve the creation of significant equity with the booming property market.

Mark and Steve are unsure how successful they will be initially. Over time, however, they expect to have considerable success which would generate significant taxable profit. Their exit strategy is a likely trade sale. However, since they do not know the extent of the business’s reliance on their personal contacts, the figure may only be around $3 million.

Required:

Mark and Steve seek your advice as to the appropriate structure to conduct their business, especially accounting for taxation and commercial risk issues.

[600 words; 12 marks] Hint:

In your consideration, you are not necessarily limited to just one structure (i.e. you may wish to consider multiple structures).