Is your business structure still suitable?
By David Downie, Partner at Allworths Chartered Accountants
Businesses come in many forms: sole traders, partnerships, trusts, companies and more… In all the excitement of starting a new business, picking the right one can be somewhat of an afterthought. You look at the pros and cons of each and then select the one that seemingly addresses most of your needs, right?
However, your needs at launch (e.g. making money as soon as possible!) are not necessarily your needs 12, 24 or 36-months in. Effective structuring needs to consider your short, medium and long-term goals in addition to your present requirements. Each structure brings its own benefits, risks and implications in three main areas:
- Asset protection
- Tax implications
- Succession planning (including attracting investors or buyers)
By the way, the answer isn’t always to pick one. Depending on your situation, a mix of structures might be best. At Allworths, we have multiple entities that each fulfil a separate, specific function. This includes a company, partnership, discretionary trust and unit trust.
As advisors, we often see businesses facing unnecessary risk or producing suboptimal tax and other outcomes due to poor structuring but, not to worry, this is something you can fix with professional support and careful planning.
Asset Protection
Business
It is important to make sure the business’ assets are protected from lawsuits and creditors. Despite your best efforts to manage debt and risk, you can’t always know what unpleasant surprises lie just around the corner.
In case a scandal was to arise, it is ideal to have your assets safely held somewhere else. And we’re not just talking about your cash and investments here – don’t forget your key intellectual property as well (e.g. trademarks and patents).
We have seen millions of dollars sitting in the bank accounts of trading entities and it’s just so unnecessary! Why not create a non-trading investment entity and move the funds there? Being time poor and focused on making money today is no excuse if it could cost you a lot more later.
Personal
Asset protection should also be considered on a personal level. For example, many young entrepreneurs hold shares in a company that they run their business through. However, this is not always a good structure for them. If one of them were to be sued for whatever reason, their portion of the assets in that business could be lost, leaving it in jeopardy.
Tax implications
Make sure you’re paying the optimal amount
No one likes to pay too much tax, so it’s important to make sure you are paying the right amount. As Kerry Packer famously said: “…as a government, I can tell you, you’re not spending it that well that we should be donating extra.”
Your structure will heavily influence the amount of tax you are legally required to pay. Different types of taxation need to be considered too (e.g. capital gains). A great deal of strategic thought and planning goes into setting up business structures that produce the optimal tax outcomes based on your short and long term goals.
It’s not simple but a hugely worthwhile exercise, especially if you start from the premise that your business is going to be highly profitable! Which, we think, is always a good place to start.
Potential tax concessions
When choosing the business’ structure, it’s also important to ensure you are considering all the tax concessions that are available to your business. Some concessions are only available to businesses with a particular structure, therefore the criteria for receiving each concession must be considered.
For example, R&D and ESIC concessions are only available to companies so, if you start a business in any other structure, these concessions will not be available and you will be up for a larger tax liability than your competitors.
Depending on your industry and line of work, it’s also worth thinking about this from a grants eligibility perspective and whether you will qualify to tender for government contracts, etc.
Attracting investors or buyers
Your structure is extremely relevant when attracting investors because it will influence how investors perceive your business. As such, your business structure should be chosen with consideration of the types of investors you are seeking and how you might be hoping to exit the business. For example, trusts aren’t well understood by overseas investors and companies are much preferred. Another example is choosing to launch an IPO so that your shares can be freely traded on the market, creating an exit opportunity (usually after an escrow period) for the initial owners.
Changing the business structure
From the example above, it’s clear that your business structure isn’t locked in. Businesses don’t usually start as listed public companies after all! Businesses evolve over time and their needs will change. The structure that was right for the business on day one may no longer be suitable (or desirable).
Engaging in “CFO thinking” and seeking professional assistance will help you evaluate whether your business structure is still suitable along with when/how it should change. Important things to consider are the tax and stamp duty consequences of restructuring, however, there are capital gains concessions and other considerations that could bring a restructure back within reach.
It’s usually never too late to fix a structure that’s no longer suitable. If you are concerned about your business structure and its suitability for your future plans, feel free to contact us.
IMPORTANT NOTICE
This document contains general information only. Allworths cannot guarantee the accuracy, completeness or timeliness of the information contained herein. By making this information available to you, we are not providing professional advice or recommendations. Allworths will not be held liable for any loss or damage arising from reliance on this document, including but not limited to any loss of profit, revenue, reputation, or any consequential losses. Before acting on any of the information contained in this document, you should seek professional advice.
