Your Business Structure Isn’t a “Set and Forget”
When was the last time you reviewed your business structure? If your answer is “when I started the business” or “when I moved from a sole trader to company over 5 years ago” might be time for a review.
One of the biggest misconceptions business owners have is believing that once they’ve registered an ABN, set up a company or established a trust, the job is done. It’s not.
Your business structure should evolve alongside your business. The structure that made perfect sense when you were turning over your first $50,000 may no longer be the right one when you’re employing staff, buying assets, bringing in business partners or planning your exit.
In Australia’s tax law, there are now over 14,000 pages that outlines different scenarios and regulations. That’s an overwhelming number and so like every good business strategy, your structure needs to be reviewed regularly, not only to ensure compliance but because your business and your future goals deserve to have the best chance of success.
Every stage of business needs to ask different questions when it comes to business structures
Business Structures at Startup: Protecting yourself while keeping things simple
Most businesses begin as sole traders. It’s inexpensive, straightforward and quick to set up. For many people, that’s exactly what’s needed while they’re testing an idea or validating whether the business will work. However, here’s the question we will always ask clients:
Are you planning to succeed?
If the answer is yes, it may be worth considering whether your initial structure is setting you up for where you want to be, not just where you are today or even in 12 months’ time.
For example:
- Do you already own a home or investment property?
- Will you need liability protection?
- Are you starting the business with someone else?
- Are you hoping to eventually sell the business?
These are all conversations worth having before you issue your first invoice, as the answers will dictate what structure is going to be a good fit for your circumstance.
Changing structures later is certainly possible, but it can involve additional accounting work, legal documentation, costs (such as stamp duty) and, in some cases, changes to registrations or other obligations.
For example, if you are planning on starting the business with someone else, then discretionary trusts are off the table as an option but a fixed trust is a possibility, although it does come with other considerations.
Starting with the end in mind can save a lot of complexity later.
Business Structures at Growth: Your structure should support your ambitions
As your business grows, so do your opportunities and your risks.
Perhaps you’re now:
- employing staff
- generating consistent profits
- purchasing equipment
- reinvesting back into the business
- thinking about bringing in investors
- expanding into new markets
- buying large personal assets like investment properties or shares.
Suddenly, the structure that once worked perfectly may begin creating limitations.
For example, some structures make it easier to retain profits inside the business for future growth (like a company), while others require profits to be distributed each year (trusts). Some structures offer greater flexibility around asset protection while others may better suit businesses seeking investment or government incentives.
As an example, a business can’t accept investments or certain government funding if set up and trading as a trust. Really what this means for the bigger picture is there isn’t a universally “best” structure.
There’s only the structure that best suits your circumstances and goals.
That’s why reviewing your structure every few years is simply good business practice.
Business Structures for Established businesses: Looking beyond today
Many business owners reach a point where they’re no longer asking:
“How do I grow?”
Instead, they’re asking:
- How do I protect what I’ve built?
- What happens if I retire?
- What if I sell the business?
- What if my family situation changes?
- How can I make this transition as tax effective as possible?
These conversations often uncover opportunities (or risks) that weren’t relevant ten years earlier.
For example:
- Changes in tax legislation may alter which structures are most beneficial.
- Your personal circumstances may have changed through marriage, separation or succession planning.
- You may now qualify for concessions or incentives that weren’t available when you first started.
- Your long-term exit strategy may require a different approach altogether.
The important thing is recognising that your business today isn’t the business you first started and your structure shouldn’t necessarily be either.
Business structures aren’t only about tax
One of the biggest misconceptions we hear is that choosing a business structure is simply about paying less tax. Tax is certainly a big part of the conversation but it’s rarely the whole conversation.
A good business structure also considers:
- Asset protection
- Cashflow requirements
- Risk management
- Future investment and re-investment into the business
- Succession planning
- Business partners
- Government incentives and funding
- Retirement planning
- Selling your business and your exit strategy
Every one of these factors influences what may be the most appropriate structure for your circumstances.
The right answer depends on your goals
Ask ten business owners what success looks like and you’ll probably receive ten different answers.
One wants to build a lifestyle business, another wants to scale nationally. Someone else wants investors to take the world by storm while someone else just wants to build a profitable business to sell in fifteen years. Others simply want to protect their family’s assets while running a business.
Different goals often require different structures, that’s why generic advice found online can only take you so far.
The real value comes from understanding your business, your personal circumstances and your long-term plans before seeking recommendations.
Review your business structures before it becomes a problem
Your accountant shouldn’t only look at your structure when you’re starting a business. It should become part of your ongoing strategic review.
A good rule of thumb is to revisit your structure every five to ten years, or sooner if something significant changes, such as:
- rapid business growth
- bringing in a business partner
- purchasing major assets
- changes to tax legislation
- succession or retirement planning
- family circumstances changing
- preparing to sell your business.
Sometimes the review will confirm you’re exactly where you need to be and sometimes it may identify opportunities that could save considerable time, risk or tax down the track.
One example is the Small Business Capital Gains Tax Concessions. Depending on your circumstances, these concessions can significantly reduce the tax payable when you eventually sell your business. One of the most generous concessions is available to eligible business owners who have held their business for more than 15 years.
However, this is where long-term planning becomes so important. If you change your business structure partway through that journey, the eligibility period may effectively start again. You may have been running your business for 15 years, but if you’ve only operated under your current structure for 10 of those years, you may need to wait another five years before qualifying. Even factors such as retaining too much income within a company can impact your eligibility.
The point isn’t to memorise the 14,000 pages of legislation, it’s to understand that decisions you make today can have significant implications years down the track. That’s why it’s a conversation worth having with your accountant.
Final thoughts
There is no “perfect” business structure, there is only the structure that best aligns with where your business is today and where you want it to be tomorrow. Businesses evolve, life changes and tax legislation changes with whatever government is in power at the time.
Your business structure should be reviewed with the same mindset to ensure it still supports your goals no matter what life (or the latest government) throw at you.
To learn more about the different business structures available to you check out the key tax obligations from the ATO
Learn how we support Small Business with their business structure at Proactive Accounting.
If you’re ready for proactive, strategic advice (not just tax-time conversations), book a call with our team to explore how we can support your business at your current stage and help prepare you for the next.
