When you’re starting out, the structure you use for your business may seem a simple choice. If you’re a one-man band, operating as a sole trader is commonplace just because it is easy to do so; if you’re working with someone else, a partnership may seem more appropriate. These structures may have some risk but are cheap to maintain. However the structure you choose at the outset may not be the most efficient or cost-effective as your business grows or changes.
Successful growth businesses typically operate through a mix of company and trust structures, which help to create separation of assets and liabilities, improve tax efficiency, promote risk management for your business interests and allow for change as it occurs.
In the early stages of running a business, the philosophy is often to keep the structure simple and the costs low, and when a business stays small, it may be entirely appropriate to keep it that way.
If your business is growing and you’re considering expanding beyond your solo status, it’s time to consider whether your structure is geared for the business you envisage it becoming.
The challenge? Knowing the right time to put in place a more efficient structure.
When should you change?
If you have a very clear vision for your business and are planning for it to grow to a significant size, there is a lot of merit in putting the basic structure in place at the beginning. Equally, if your plan is to maintain a micro-business, keep your structure simple and don’t be seduced by advice that over-complicates what you need. Your business structure should be appropriate and consistent with your expectations for the business – be they large or small.
More often than not, business owners start off small but need to make changes when growth accelerates. Changing your business structure can be costly, so the earlier you identify the right structure – or the need to restructure – the better. As always, with opportunities missed there can be consequences and you may find yourself exposed to capital gains tax and stamp duty as well as the distraction of changing how your business operates.
What should you be looking for?
The most common indicator that it’s time for a change is a significant increase in the activity, profit and assets of your business.
Generally speaking, ‘significant’ means that if the earnings of the business or activity extend beyond the personal output of the soloist then business value is starting to accrue.
But there can be hidden value in a business that needs to be considered, and this has to do with the creation of intellectual property or new opportunities that could send the value of a business skyrocketing before the activity occurs.
If you identify these emerging features in your business it’s time to consider whether the structure you have established is appropriate for the longer term.
Why should you change?
Your business can be a large asset – maybe the biggest asset you own if things work out – but with that comes risk, tax, and complication. The structure chosen will facilitate control over these factors.
The material increase in your tax exposure as a result of increasing profits and earnings prompts a need for change and is when most people trundle off to their accountant. It’s normal that you don’t want to pay any more tax than is necessary, the right structure can help to manage the impact of tax and the timing differences between profit and cash appearing in your business.
Finally, if you’re expecting to sell your business or introduce partners or stakeholders at any point in the future, then structure makes a huge difference. To maximise your access to tax concessions and in particular the capital gains tax (CGT) small business concessions, you need to have your structure right well in advance of any sale or merger.
Don’t believe your accountant can wave the magic wand after the event without risk, managing this position after it is too late is only about mitigating the damage – the real opportunity is already lost.
Managing the transition
There are some ways to manage the tax costs associated with a change in structure. The first thing to do is to identify the structure that is right for your business. From there, quantify the cost of any change and the best way to put it into effect.
It is essential that you get advice before you make any major structural changes to your business. Ensure there is plenty of time and that you have a solution in place to transition the control and leadership as part of a total fully managed transition.
How did you determine the best structure for your business? What have the implications been?