Selecting the right structure is one of the most important decisions you can make when starting up a business.
This is often mistakenly treated as a simple administrative decision between choosing a sole trader, partnership, trust or company. However, there are costs to be borne and opportunities lost by not making a properly informed choice. This choice should be based on a number of key factors that determine whether one, or a combination of these structures, will best support your business and personal wealth objectives.
Some of the key questions you should consider when choosing your structure include:
- How long will you own the business?
- Will you employ staff?
- What markets you are going to sell to?
- Will you restructure in the future?
- Will you reinvest or take profits?
- What additional funds will you need?
- Do you plan to bring on other investors, issue shares or offer ownership options to employees?
Failing to implement the most effective structure to suit your needs can affect your personal wealth and tax position, add complexity, administration and compliance costs, provides less asset protection and impact commercial needs.
It’s commonly understood that the right structure can help to separate and protect your personal assets from business risks and better help to manage risk in liability situations.
However, the many commercial ramifications of your chosen structure may not spring to mind when setting up the business, and their impact will become significant when operation commences. Banks, insurers, landlords and other important external parties can be less willing to deal with certain structures. Investors may also be reluctant to deal with you, particularly if the structure affects their ability to obtain a stake in the business, in return for the cash and valuable business management expertise they provide.
Tax implications are often high on the list of considerations for business owners. As such it’s important to understand how your choice of structure impacts on the tax treatment of business profits and losses, as well as your personal income or drawings as an owner.
Certain structures enable small businesses to access tax concessions and discounts that can minimise tax paid, or even return substantial amounts of cash back to the business. This is particularly important when you come to sell the business and want to maximise your return on investment.
There are many issues to consider and structural solutions to support your business and personal wealth creation needs. Taking adequate time at the outset to implement the most effective structure will ensure you reap the maximum financial rewards during the life of the business and beyond.
Marc Peskett is a partner of MPR Group a Melbourne based firm that provides business structuring advice, as well as accounting, tax, business advisory and financial services to fast growing small to medium enterprises.