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Three things every small business should consider when choosing the right structure

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Whether you’re starting out, looking to protect your assets or simply revising your structure for expansion, choosing the right business structure is critical to building a solid foundation for a successful company.

Everyone gets caught up in the whirlwind of setting up their business, but understanding the responsibilities of each structure is crucial. As Cheree Woolcock, Partner at DFK Benjamin King Money explains, it impacts everything, from ongoing costs to the tax you’re liable to pay.

Asset protection: Guard the family home

Overwhelmingly, the number one consideration for choosing the right business structure is asset protection for the owners, says Woolcock.

Many family homes are held in joint names of spouses. This is important to review if you’re running a business in your own name and concerned that your assets are subject to attack by creditors, or you are subject to a claim as the director.

In most cases, it’s the director of the company who is going to come under attack. Whether it be a creditor suing for nonpayment of outstanding debt, a bank taking action when financing hasn’t been adhered to, or the tax office hunt you down with issues related to employment obligations, Woolcock says.

“If there’s a husband and wife situation, then you wouldn’t want both of them to be directors because the assets of that couple could potentially be at risk. We advise moving the family home between spouses.

“If the wife was in business, we’d make her Director but transfer all the assets into the husband’s name prior to commencing.”

Seek professional advice

Seek expert advice from business professionals to run you through the pros and cons of various business entities, says Woolcock.

For example, good advice can mean access to capital gains tax small business concessions that you may otherwise be unaware of. Or it may reveal that the business owner may be able to sell their business at a significant profit, potentially paying little or no tax.

“I’m acting for a client who has run a restaurant for 20 years. He will qualify for the capital gains tax small business concession; once he sells the business he won’t pay any tax on the profit of that. He’s going to have made a $1.2 million gain on the property, but that tax is going to be absolutely minimal because of the way that’s been structured. Very rarely can you do it after the event,” she says.

Dont go cheap: Pay for a good structure

If you set up a cheap structure it may come back to haunt you. An advisor can help you consider each structure’s level of flexibility in terms of bringing in new business partners or exiting partners from the business, or help you analyse your financing requirements.

Some industries have specific structuring requirements, so in that case you’re bound by your professional association as to your preferred structure, she says.

“Typically, smaller businesses or startups think they can do it all themselves and they find later on the taxes are a nightmare.”

Be wary: if things go pear shaped and you’re stuck it can be difficult to go back.

“Nobody intentionally sets up a bad business. People have good intentions but unfortunately things go wrong for different reasons.”

Written by: Thea Christie

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DFK ANZ is a national association of 15 independent accounting and business advisory firms. Established in 1991, it has built a strong reputation as leading experts, and is listed as number 22 on the latest BRW Top 100 Accounting firms.