Knowing when to change your business structure

17 March 2011

Having the right structure for your business is fundamental to not only its initial success but also its ongoing ability to grow, remain flexible, tax-effective, protect assets within and outside the business, and minimise your costs.

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 makes sense; if you're working with someone else, a partnership may seem more appropriate. However the structure you choose at the outset may not be the most efficient or cost-effective as your business grows or changes.

Successful fast 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 low cost, and when a business stays small, it may be entirely appropriate to keep it that way. If your business is growing, 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 it is going to grow to a significant size then 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 it simple and don't be seduced by advice that over complicates what you need. Your structure should be appropriate and consistent with your expectations for the business – be they large or small.

More often than not , many business owners start off small and then with accelerated growth comes change. Changing your business structure can be costly, so the earlier you identify the right structure – or the need to restructure - the better. Otherwise you may find yourself exposed to capital gains and stamp duty as well as the distraction of changing how your business operates.

What should you be looking for?

When you can see significant value building in your business, either through assets held in the business or the development of goodwill or intellectual property, it's time to consider whether the structure you have established is appropriate for the longer term.

In addition to the value of your business, the material increase in your tax exposure as a result of increasing profits and earnings from the business could prompt a need for change. Apart from the fact 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, then structure makes a huge difference. To maximise your access to tax concessions and in particular the CGT small business concessions, you need to have your structure right well in advance of any changes.

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. Ensure there is plenty of time and that the owner/manager has a solution to transition the control and leadership as part of a total fully managed transition.

If you need help in identifying or transitioning your business structure, contact us on (02) 9957 4033 or drop us a line via our contact form.

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This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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